Working Paper: NBER ID: w30577
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: Global risk; Emerging markets; Capital flows; Tail risk; Mutual funds; ETFs
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) | extreme downside risk in emerging markets (F65) |
| global risk shocks (F65) | capital outflows (F32) |
| risk aversion shocks (D81) | narrowing of equity flow distribution (D39) |
| macro uncertainty shocks (E39) | extreme downside risk in emerging markets (F65) |
| risk shocks (D81) | negative median flow responses (E50) |
| risk aversion shocks (D81) | slowdown in inflows and outflows (F32) |
| global risk shocks (F65) | tails of the distribution of capital flows and returns (F32) |
| risk aversion shocks (D81) | tails of the distribution of capital flows and returns (F32) |