Investor Risk Aversion and Financial Fragility in Emerging Economies

Rovelli, Riccardo (2000) Investor Risk Aversion and Financial Fragility in Emerging Economies. Bologna: Dipartimento di Scienze economiche DSE, p. 39. DOI 10.6092/unibo/amsacta/4929. In: Quaderni - Working Paper DSE (380). ISSN 2282-6483.
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Abstract

Bank intermediated short-term capital inflows play a crucial role in the financial structure of many emerging economies. Yet since these funds are subject to the risk of early withdrawal, an excessive reliance on this financing is often associated with a financial or currency crisis. We model a situation where withdrawals are motivated by a change in either the domestic or foreign fundamentals. We show that, for a given change in fundamentals, a sudden reversal in the capital flows, and hence a financial crisis, is more likely the more risk averse are the foreign investors. We also show that a policy to tax early withdrawals may discourage the inflows more likely to cause fundamental runs, as it prevents the relatively more risk averse investors from investing. However, the policy must be fine-tuned to avoid discouraging all capital inflows.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Rovelli, Riccardo
Keywords
Short-term capital inflows, Financial fragility, Chilean tax
Subjects
ISSN
2282-6483
DOI
Deposit date
05 Apr 2016 10:10
Last modified
05 Apr 2016 10:10
URI

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