Do Capital Flows Respond to Risk and Return?

Do Capital Flows Respond to Risk and Return?

This paper explores empirically the role of risk and return in the observed evolution of net foreign asset positions of industrial and developing economies. The paper adopts a dynamic approach in which investors' portfolios adjust gradually to...

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Bibliographic Details
Main Authors:	Calderon, Cesar, Loayza, Norman, Serven, Luis
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	CAPITAL FLOWS CAPITAL CONTROLS PER CAPITA INCOME ASSET OWNERSHIP DIVERSIFICATION GROSS DOMESTIC PRODUCT PORTFOLIO COMPOSITION PORTFOLIO INVESTMENT FLOWS ANNUAL OBSERVATIONS ASSETS BALANCE OF PAYMENTS BONDS CAPACITY BUILDING CENTRAL BANK DEBT DEVELOPMENT INDICATORS DOMESTIC INVESTMENT ECONOMIC ACTIVITY ECONOMIC PERFORMANCE EMERGING MARKETS EMPIRICAL ANALYSIS EQUILIBRIUM EQUILIBRIUM MODELS EXCHANGE RATE EXPECTED RETURN EXPECTED RETURNS EXPORTS FACTOR MARKETS FINANCIAL MARKETS FOREIGN ASSETS FOREIGN CURRENCY FOREIGN INVESTMENT FOREIGN INVESTORS GDP GDP PER CAPITA GROWTH RATE HUMAN CAPITAL IMPERFECT INFORMATION IMPORTS INCOME INDUSTRIAL ECONOMIES INFLATION IRREVERSIBILITY LABOR INPUTS LOW-INCOME COUNTRIES MACROECONOMICS MARGINAL COSTS MARKET FACTORS MARKET INCENTIVES MIDDLE INCOME COUNTRIES NATURAL RESOURCES OPTIMIZATION PERMANENT INCOME PERMANENT INCOME HYPOTHESIS POLICY RESEARCH PORTFOLIO PROFITABILITY PROPERTY RIGHTS REAL GDP RISK MEASUREMENT SCALE ECONOMIES TERMS OF TRADE TIME SERIES TOTAL FACTOR PRODUCTIVITY TRANSACTION COSTS WEALTH PORTFOLIO INVESTMENT FLOWS ANNUAL OBSERVATIONS
Online Access:	http://documents.worldbank.org/curated/en/2003/05/2390970/capital-flows-respond-risk-return http://hdl.handle.net/10986/18215

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Summary:	This paper explores empirically the role of risk and return in the observed evolution of net foreign asset positions of industrial and developing economies. The paper adopts a dynamic approach in which investors' portfolios adjust gradually to their long-run equilibrium, defined by a standard Tobin-Markowitz framework. The parameters characterizing the long-run equilibrium are estimated using data on foreign assets and liabilities of a large number of industrial and developing countries spanning the period from 1965 to 1997. The paper employs a dynamic panel estimation procedure allowing for unrestricted short-run heterogeneity across countries, using the pooled mean group estimator recently developed by Pesaran, Shin, and Smith (1999). The empirical results lend considerable support to the model when applied to countries with low capital controls and/or high and upper-middle income. The results for countries with either high capital controls or low per capita income are less supportive of the stock equilibrium model for net foreign asset positions.