Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets

18 Pages Posted: 29 Jan 2013

See all articles by Robert N. McCauley

Robert N. McCauley

University of Oxford - Oxford Centre for Global History; Boston University, Global Development Policy Center

Multiple version iconThere are 3 versions of this paper

Date Written: January 29, 2013

Abstract

This paper describes the international flow of funds associated with calm and volatile global equity markets. During calm periods, portfolio investment by real money and leveraged investors in advanced countries flows into emerging markets, leading to an asymmetric asset swap (risky emerging market assets against safe reserve currency assets) and leveraging up by emerging market central banks. In declining and volatile global equity markets, these flows reverse, and, contrary to some claims, emerging market central banks draw down reserves substantially. In effect emerging market central banks then release safe assets from their reserves, supplying safe havens to global investors.

Keywords: capital flows, safe assets, international flow funds, vix, global liquidity

JEL Classification: E58, F3, G15

Suggested Citation

McCauley, Robert N. and McCauley, Robert N., Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets (January 29, 2013). ADBI Working Paper 405, Available at SSRN: https://ssrn.com/abstract=2206758 or http://dx.doi.org/10.2139/ssrn.2206758

Robert N. McCauley (Contact Author)

Boston University, Global Development Policy Center ( email )

67 Bay State Road
Boston, MA 02215
United States

University of Oxford - Oxford Centre for Global History ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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