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Risk Aversion, Wealth and International Capital Flows
Author(s) -
Clark Ephraim,
Jokung Octave
Publication year - 1998
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00121
Subject(s) - diversification (marketing strategy) , economics , consumption based capital asset pricing model , capital (architecture) , asset (computer security) , capital flows , capital asset pricing model , risk aversion (psychology) , monetary economics , capital asset , financial capital , financial economics , microeconomics , expected utility hypothesis , finance , business , profit (economics) , computer security , archaeology , marketing , computer science , history
This paper models capital flows in a rich–poor, two‐country, two‐asset, dual‐risk economy with decreasing absolute risk aversion. The first risk is asset‐specific. The second is political and dependent; i.e., related to particular asset outcomes. In this framework, the role of wealth in determining asset preferences is demonstrated, and the conditions for diversification are derived. The wealth effect and diversification conditions are applied to explain ongoing two‐way capital flows in general as well as the apparent paradox of domestic capital flight with simultaneous inflows of foreign capital.