Working Paper: CEPR ID: DP17697
Authors: Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
Abstract: Global risk and risk aversion shocks have distinct distributional impacts on emerging market capital flows and returns. In particular, we find salient consequences of these different global shocks for tail risk in emerging markets. Open-end mutual fund trading provides a key mechanism linking shocks facing global investors to extreme capital flow and return realizations. The effects are heterogeneous across asset classes and fund types. The limited discretion and higher conformity of passive fund investments linked to benchmarking amplify pass-through effects that engender abnormal co-movements in emerging market flows and returns.
Keywords: Nonbank financial intermediation; Tail risk; Mutual funds; Exchange traded funds; Emerging markets
JEL Codes: F3; F32; G11; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global risk shocks (F65) | Emerging market capital flows (F32) |
| Global risk shocks (F65) | Extreme outflows (F32) |
| Risk aversion shocks (D81) | Equity flows (F21) |
| Risk aversion shocks (D81) | Tails in reaction for equity flows (F32) |
| Global risk shocks (F65) | Tail responses (Y60) |
| Passive fund flows (G23) | Global risk shocks (F65) |