Location of Investors and Capital Flight
21 Pages Posted: 13 Feb 2002
Abstract
This paper utilizes a very simple model to study the timing and determinants of speculation against a fixed exchange rate regime when investors are heterogeneous because of locational differences. Location matters because resident players may incur smaller costs when taking a short-position, are less exposed to exchange rate risk, possess better information quality, have more knowledge about each others information sets, due to asymmetries in tax treatment, or because of the presence of government guarantees. Our model clarifies the respective roles played by local and international investors during episodes of capital flight as well as the resulting room of maneuver for policymakers in emerging markets.
Keywords: locational heterogeneity, private information, exchange rate volatility, illiquidity, capital flight
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