We examine the role of FDI in facilitating money laundering and illegal capital flight, focusing on transition economies' FDI outflows because they largely reflect current investment decisions rather than the inertia of past decisions. We estimate a model of FDI outflows in which illicit money flows influence the volume of FDI directed toward countries considered to be centers of money laundering. We show that traditional models of FDI are not able to account for these investment flows and that our results are robust when additional explanatory variables such as host country tax rates, governance, corruption, and cultural differences between the home and host country are included in the model. We estimate that 6 to 10% of total FDI outflows and over 20% of FDI to money-laundering countries from our sample were made to facilitate illicit money flows.

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The effect of corruption on FDI is analysed. Using FDI outflows from a sample of East European transition economies that had virtually no outward FDI before 1995, FDI flows are observed based mainly on current investment decisions and less on the inertia of past investments. The model separates the effects of corruption on FDI location decisions and on the amount invested. A linear and negative relationship is found between host‐country corruption and the likelihood of MNCs locating in that country. The relationship between home‐country corruption and FDI is non‐monotonic, with an inverse U shape where both high and low levels of corruption in the home country reducing the probability of outward FDI flows. If FDI is undertaken to a host country, the volume of FDI is affected by home‐country but not by host‐country corruption.

Are catastrophe bonds (CAT bonds) zero-beta investments? Are they a valuable new source of diversification for investors? We study these questions by analysing the dynamic relations of CAT bond returns and the returns of the stock, corporate bond and government bond markets. Our multivariate GARCH model results provide evidence that CAT bonds are zero-beta assets only in non-crisis periods. We document that CAT bonds were not immune to the effects of the recent financial crisis. With the collapse of Lehman Brothers, CAT bond returns became significantly correlated with the market. However, the relatively small effect of the crisis on CAT bonds compared with other asset classes make them a valuable source of diversification for investors. Finally, it seems that the improved structures for new CAT bonds issued since 2009 have been positively received by the market, as CAT bond betas returned to pre-crisis levels.

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