Working Paper: NBER ID: w27927
Authors: Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
Abstract: This paper characterizes the implications of risk-on/risk-off shocks for emerging market capital flows and returns. We document that these shocks have important implications not only for the median of emerging markets flows and returns but also for the left tail. Further, while there are some differences in the effects across bond vs. equity markets and flows vs. asset returns, the effects associated with the worst realizations are generally larger than that on the median realization. We apply our methodology to the COVID-19 shock to examine the pattern of flow and return realizations: the sizable risk-off nature of this shock engenders reactions that reside deep in the left tail of most relevant emerging market quantities.
Keywords: capital flows; emerging markets; risk-on risk-off; covid-19; tail risk
JEL Codes: F21; F3; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RoRo shocks (E32) | capital flows (F32) |
| RoRo shocks (E32) | returns (Y60) |
| riskoff shocks (D80) | worst portfolio outflow realizations (G11) |
| riskoff shocks (D80) | median flows (E50) |
| riskoff shocks (D80) | left tail of portfolio flow distribution (D39) |
| riskoff shocks (D80) | worst return realizations (G19) |
| riskoff shocks (D80) | median return realization (D39) |
| RoRo shock (C69) | tails of the weekly bond and equity distribution (G12) |