Reassessing international investment patterns: a revisitation of Lane and Milesi-Ferretti's evidence.

Pierucci, Eleonora and Pericoli, Filippo and Ventura, Luigi (2014): Reassessing international investment patterns: a revisitation of Lane and Milesi-Ferretti's evidence.

Abstract

We show that recent methodological advances in econometric theory raise questions about the results obtained by Lane and Milesi-Ferretti (LMF) in relation to the determinants of international investment patterns (International Investment Patterns, The Review of Economics and Statistics 2008; 90(3): 538{549). We find that LMF's estimated equations are affected by heteroscedasticity (which can lead to inconsistent estimates in log-linearized models), and that the results depend on the pattern of heteroscedasticity assumed and on the estimation method applied. Thus, LMF's findings need to be reassessed. Moreover, we extend the dataset over time to estimate the panel version of the LMF's equations (over years 2001{2009). Our panel allows for the proper accounting of unobserved heterogeneity through country-pair fixed effects and improves the cross-section analysis reconciling empirical evidence with economic theory. Irrespective of the estimation method, we identify a clear diversification motive which drives international equity purchases.

• Item Type: MPRA Paper
• Language: English
• Keywords: International investment patterns, portfolio choices, gravity models.
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

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

Aviat, A. and N. Coeurdacier (2007). The geography of trade in goods and asset holdings. Journal of International Economics 71 (1), 22(51).

Balli, F., R. Louis, and M. Osman (2011). The patterns of cross-border portfolio investments in the GCC region: Do institutional quality and the number of expatriates play a role? Journal of Economics and Finance 35 (4), 434(455).

Breusch, T. S. and A. R. Pagan (1979). A simple test for heteroscedasticity and random coefficient variation. Econometrica 47 (5), 1287(94).

Burger, M., F. van Oort, and G.-J. Linders (2009). On the specification of the gravity model of trade: Zeros, excess zeros and zero-inflated estimation. Spatial Economic Analysis 4 (2), 167(190).

Coeurdacier, N. and S. Guibaud (2011). International portfolio diversification is better than you think. Journal of International Money and Finance 30 (2), 289(308).

Gomez-Herrera, E. (2013). Comparing alternative methods to estimate gravity models of bilateral trade. Empirical Economics 44 (3), 1087(1111).

Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica 50 (4), 1029(54).

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

Maddala, G. (1991). A perspective on the use of limited-dependent and qualitative variables models in accounting research. The Accounting Review 66 (4), 788(807).

Manning, W. G. and J. Mullahy (2001). Estimating log models: To transform or not to transform? Journal of Health Economics 20, 461(494).

Martin, P. and H. Rey (2004). Financial super-markets: Size matters for asset trade. Journal of International Economics 64 (2), 335 (361).

Martinez-Zarzoso, I. (2013). The log of gravity revisited. Applied Economics 45 (3), 311(327).

Mishra, A. V. (2007). International investment patterns: Evidence using a new dataset. Research in International Business and Finance 21 (2), 342(360).

Papke, L. E. and J. M. Wooldridge (1996). Econometric methods for fractional response variables with an application to 401(k) plan participation rates. Journal of Applied Econometrics 11 (6), 619(32).

Papke, L. E. and J. M. Wooldridge (2008). Panel data methods for fractional response variables with an application to test pass rates. Journal of Econometrics 145 (1-2), 121(133).

Park, R. E. (1966). Estimation. Econometrica 34 (4), 888. 10

Pericoli, F., E. Pierucci, and L. Ventura (2013). Cross-border equity portfolio choices and the diversification motive: A fractional regression approach. Economics Letters 121 (2), 282(286).

Pierucci, E. and L. Ventura (2010). Risk sharing: A long run issue? Open Economies Review 21 (5), 705(730).

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

Ramalho, E. A., J. J. Ramalho, and J. M. Murteira (2011). Alternative estimating and testing empirical strategies for fractional regression models. Journal of Economic Surveys 25 (1), 19(68).

Santos Silva, J. M. C. and S. Tenreyro (2006). The log of gravity. The Review of Economics and Statistics 88 (4), 641(658).

Tinbergen, J. (1962). Shaping the World Economy: Suggestions for an International Economic Policy. The Twentieth Century Fund, New York.