In Search of the Origins of Fickle Capital
Zhiyu Fu, Joint program of Financial Economics PhD student
It is well-known in the literature that international capital flows are fickle: During contractions, investors reduce their investment in foreign countries and retrench toward home markets. This observation motivates numerous theories and policy discussions. However, as this pattern is mostly observed using aggregate capital flow data, it is unclear who exactly are the fickle investors, how they behave, and why they are fickle. Answers to these questions help to understand the welfare implication of fickle capital flows and inform a better policy design. This project seeks to take a step in this direction. By exploiting detailed portfolio-level data of global institutional investors from various sources, I plan to broadly explore two sets of questions:
- Who are the fickle investors? What characteristics of the institutions are associated with fickle capital flows?
- When fickle investors retrench, where do they go? Do they invest more in their home countries, home currencies, or safe-haven currencies such as the US dollar?