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International investment positions and risk sharing: an empirical analysis on the coordinated portfolio investment survey

Pericoli, Filippo and Pierucci, Eleonora and Ventura, Luigi (2011): International investment positions and risk sharing: an empirical analysis on the coordinated portfolio investment survey.

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Abstract

By using data from all available waves of the IMF Coordinated Portfolio Investment Surveys, we explore the determinants of bilateral portfolio investments and their dynamics. The main goal of our analysis is that of understanding whether a diversication motive can be found, among the various determinants. We introduce a new diversification variable given by the correlation between the idiosyncratic components of GDP growth and first take into account unobserved heterogeneity by means of a country pair-fixed effect, panel estimation relaxing the more restrictive double fixed effects model due to Lane and Milesi-Ferretti (REStat 90:538-549, 2008). We find strong evidence that a diversication motive is relevant to explain bilateral portfolio holdings. The same results cannot be obtained from cross section estimations as in previous literature. It also turns out that investing in stocks of less synchronised partner economies does not bring about a lot of income smoothing, as one might have expected.

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