Do U.S. investors worry about fear in international equity markets? Empirical evidence on dynamic panel data

This is the first study of the dynamic relation between U.S. bilateral equity flows and the Chicago Board Options Exchange (CBOE's) implied volatility around the globe that employs the panel vector autoregression. We primarily find the unidirectional interdependence relation from the fear indices to the U.S. net equity flows and to the U.S. equity outflows, respectively. In addition, the impact of the fear indices on the U.S. equity flows is asymmetric, suggesting that U.S. investors are more sensitive during a high level of fear in foreign equity markets. Moreover, flight‐to‐quality, informational frictions and distance, and benefits of international portfolio diversification help to explain the movement of U.S. capital flows between European countries and Asia‐Pacific countries. Our findings call for policy makers in local equity markets to consider the impact.