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.

Abstract

By using data from all available waves of the IMF Coordinated Portfolio Investment Surveys, we explore the dynamics of the determinants of bilateral portfolio investments. The main aim of our analysis, however, is to understand whether a diversification motive can also be found, among the various determinants. We find strong evidence that, indeed, the correlation between the idiosyncratic components of GDP growth, as well as the correlation between stock returns among pair of countries, that we consider as proxies for diversification, are relevant to explain bilateral portfolio holdings, when unobserved heterogeneity is properly taken into account, by means of a fixed effect, panel estimation (where the fixed effects refer to pair of countries, rather than countries in isolation). Interestingly, the same results cannot be obtained from cross section estimations. It also turns out that the diversification motive is less relevant, if at all, in choosing whether or not to invest in a particular area.

• Item Type: MPRA Paper
• Language: English
• Keywords: Coordinated Portfolio Investment Survey; risk sharing; gravity models
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Ahearne, A. G., W. L. Griever, and F. E. Warnock (2004). Information costs and home bias: an analysis of U.S. holdings of foreign equities. Journal of International Eco- nomics 62(2), 313–336.

Asdrubali, P., B. E. Sorensen, and O. Yosha (1996). Channels of interstate risk sharing: United States 1963-1990. The Quarterly Journal of Economics 111 (4), 1081–1110.

Bai, Y. and J. Zhang (2004). Financial integration and international risk sharing. Manuscript, Arizona State University.

Balli, F., S. A. Basher, and H. O. Balli (2011). Income insurance and the determinants of income insurance via foreign asset revenues and foreign liability payments. Economic Modelling 28(5), 2296 – 2306.

Bracke, T. and M. Schmitz (2008). Channels of international risk-sharing: capital gains versus income flows. ECB Working Paper Series (938).

Buch, C. M. (2002). Are banks different? evidence from international data. International Finance 5(1), 97–114.

Dahlquist, M., L. Pinkowitz, R. M. Stulz, and R. Williamson (2003). Corporate governance and the home bias. Journal of Financial and Quantitative Analysis 38 (1), 87–110.

Giannone, D. and L. Reichlin (2006). Trends and cycles in the euro area: how much heterogeneity and should we worry about it? Working Paper Series, European Central Bank (595).

Kaminsky, G. L., C. M. Reinhart, and C. A. Vegh (2005). When it rains, it pours: Procycli- cal capital flows and macroeconomic policies. NBER Macroeconomics Annual 2004 19, 11–53.

Kose, M. A., E. S. Prasad, and M. E. Terrones (2006). How do trade and financial inte- gration affect the relationship between growth and volatility? Journal of International Economics 69(1), 176–202.

Kose, M. A., E. S. Prasad, and M. E. Terrones (2008). Does financial globalization promote risk-sharing? Journal of Development Economics 89.

Lane, P. R. and G. M. Milesi-Ferretti (2008). International investment patterns. The Review of Economics and Statistics 90 (3), 538–549.

Lewis, K. (1999). Explain home bias in equities and consumption. Journal of Economic Literature 37, 571–608.

Martin, P. and H. Rey (2004). Financial super-markets: size matters for asset trade. Journal of International Economics 64, 335–361.

Porta, R., F. Lopez-De-Silanes, and A. Shleifer (2005). What works in securities laws? Journal of Finance 61(1), 1–32.

Portes, R. and H. Rey (2005). The determinants of cross-border equity flows. Journal of International Economics 65(2), 269–296.

Rose, A. K. and M. M. Spiegel (2004). A gravity model of sovereign lending: trade, default and credit. IMF Staff Papers 51, 64–74.

Sorensen, B. E., Y.-T. Wu, O. Yosha, and Y. Zhu (2007). Home bias and international risk sharing: Twin puzzles separated at birth. Journal of International Money and Finance 26(4), 587–605.

Stein, E. and C. Daude (2007). Longitude matters: Time zones and the location of FDI. Journal of International Economics 71, 96–112.

Wei, S.-J. (2000). How taxing is corruption on international investors? The Review of Economics and Statistics 82, 1–11.

Yildrim, C. (2003). Informational asymmetries, corporate governance infrastructure and foreign portfolio equity investment. mimeo, University of Tilburg.