Do contagion effects exist in capital flow volatility?

• Published in: Journal of the Japanese and international economies Vol. 30; pp. 76 - 95
• Main Authors: Lee, Hyun-Hoon, Park, Cyn-Young, Byun, Hyung-suk
• Format: Journal Article
• Language: English
• Published: Duluth Elsevier Inc 01.12.2013; Elsevier BV
• Subjects: Capital flow; Capital movement; Contagion; Cross border transactions; Developing countries; Economic theory; Emerging countries; Emerging markets; Foreign direct investment; Foreign investment; Global economy; International; International economics; LDCs; Manycountries; Spillovers; Studies; Volatility; Volatility of capital flows; F36; Contagion; G15; Emerging countries; F21; Volatility of capital flows
• ISSN: 0889-1583; 1095-8681
• DOI: 10.1016/j.jjie.2013.10.002

•We find strong contagion effects in the volatility of capital flows.•The magnitudes of contagion vary depending on the type of capital flows.•The volatility of FDI flows is least susceptible to intra-regional contagion.•The volatility of capital flows is more contagious when measured in net inflows. The cross-border transmission of a financial shock has been a subject of rich literature. While a large number of studies have focused on the phenomenon of strong co-movements of asset prices and capital flows in the event of financial stress, very few discussed the contagion or spillover effects in terms of capital flow volatility. This paper is one of the first attempts to assess, empirically, whether or not there is a global and regional spillover effect in the volatility of capital flows to emerging and developing countries. Based on the sample of 49 emerging and developing countries for the period 1980–2009, the empirical results suggest strong and significant contagion effects in the volatility of capital flows to individual economies. The magnitudes of contagion vary depending on the type of capital flows, whether it is foreign direct investment (FDI) or portfolio and other investment (mostly bank lending). The findings also suggest the volatility dynamics of gross flows is different from that of net flows. The volatility of net inflows is more exposed to intra-regional contagion compared to that of gross inflows.