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Decomposing the U.S. external returns differential

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  • Curcuru, Stephanie E.
  • Dvorak, Tomas
  • Warnock, Francis E.
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    Abstract

    We decompose the returns differential between U.S. portfolio claims and liabilities into the composition, return, and timing effects. Our most striking and robust finding is that foreigners exhibit poor timing when reallocating between bonds and equities within their U.S. portfolios. The poor timing of foreign investors-caused primarily by deliberate trading, not a lack of portfolio rebalancing-contributes positively to the U.S. external returns differential. We find no evidence that the poor timing is driven by mechanical reserve accumulation by emerging market countries; rather, it is driven almost entirely by the poor timing of rich, developed (mainly European) countries. Finally, while poor foreign timing appears to be persistent across subsamples, other terms in our decomposition (the composition and return effects and U.S. timing abroad), as well as the overall differential, are sometimes negative, sometimes positive, and usually indistinguishable from zero.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Economics.

    Volume (Year): 80 (2010)
    Issue (Month): 1 (January)
    Pages: 22-32

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    Handle: RePEc:eee:inecon:v:80:y:2010:i:1:p:22-32

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    Web page: http://www.elsevier.com/locate/inca/505552

    Related research

    Keywords: Returns differential Timing effect;

    References

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    Cited by:
    1. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2013. "On Returns Differentials," NBER Working Papers 18866, National Bureau of Economic Research, Inc.
    2. Curcuru, Stephanie E. & Thomas, Charles P. & Warnock, Francis E., 2013. "On returns differentials," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 1-25.
    3. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2011. "US International Equity Investment and Past and Prospective Returns," American Economic Review, American Economic Association, vol. 101(7), pages 3440-55, December.

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