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

Bank for International Settlements (BIS)

Multiple version iconThere are 3 versions of this paper

Date Written: January 29, 2013


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., 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)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt

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