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Foreign Investors and Risk Shocks: Seeking a Safe Haven or Running for the Exit?

38 Pages Posted: 9 Nov 2013  

Maurizio Michael Habib

European Central Bank (ECB)

Livio Stracca

European Central Bank (ECB)

Date Written: October 30, 2013

Abstract

In this paper we study the impact of shocks to global risk and global risk aversion (such as Lehman) as well as shocks with a more idiosyncratic nature (such as the euro debt crisis) on cross border portfolio flows, taking the perspective of foreign investors. We find robust evidence of systematic portfolio outflows in the wake of both types of shocks. There are no securities which are consistently safe haven assets, namely experiencing portfolio inflows when risk is on the rise or perceived to be high. Nevertheless, especially money market instruments issued by the US, euro area low-yield countries and Japan, as well as securities issued in Switzerland have behaved as safe haven assets in specific episodes or following changes in certain risk measures. We also find that the role of US-based crises and risk shocks is special, with the US not necessarily experiencing portfolio outflows or even attracting inflows for short-term dated securities, as a safe haven country, in those episodes.

Keywords: safe haven, portfolio flows, information, risk aversion, home bias

JEL Classification: G11, G15

Suggested Citation

Habib, Maurizio Michael and Stracca, Livio, Foreign Investors and Risk Shocks: Seeking a Safe Haven or Running for the Exit? (October 30, 2013). ECB Working Paper No. 1609. Available at SSRN: https://ssrn.com/abstract=2347459

Maurizio Michael Habib (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Livio Stracca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

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