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The Geography of International Portfolio Flows, International CAPM, and the Role of Monetary Policy Frameworks

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  • Roberto A. De Santis

    (European Central Bank)

Abstract

Using bilateral data on international equity and bond flows, we find that (i) the prediction of the International Capital Asset Pricing Model is partially met and that global equity markets might be more integrated than global bond markets, and (ii) asset allocators engage in trend-chasing activities, particularly in bond markets. Moreover, over the turbulent 1998-2001 period characterized by an equity bubble and the subsequent burst, we find evidence that investors preferred portfolio assets of countries where the central bank gave relative importance to money. As for EMU, once controlling for diversification benefits and the elimination of the exchange rate risk, we show that cross-border portfolio flows among euro-area countries have increased due to the catalyst effect of EMU. Countries’ shares in the world market portfolio, home bias, initial degree of misallocation across countries, past returns, diversification benefits, and EMU can explain 35-40 percent of the total variation in equity and bond asset flows.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 6 (2010)
Issue (Month): 2 (June)
Pages: 147-197

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Handle: RePEc:ijc:ijcjou:y:2010:q:2:a:6

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Cited by:
  1. Ulf Söderström, 2008. "Re-Evaluating Swedish Membership in EMU: Evidence from an Estimated Model," NBER Working Papers 14519, National Bureau of Economic Research, Inc.
  2. Alberto Felettigh & Paola Monti, 2008. "How to interpret the CPIS data on the distribution of foreign portfolio assets in the presence of sizeable cross-border positions in mutual funds. Evidence for Italy and the main euro-area countries," Questioni di Economia e Finanza (Occasional Papers) 16, Bank of Italy, Economic Research and International Relations Area.
  3. N. Holinski & C.J.M. Kool & J. Muysken, 2011. "The Impact of International Portfolio Composition on Consumption Risk Sharing," Working Papers 11-20, Utrecht School of Economics.
  4. Pieterse-Bloem, M., 2011. "The effect of Emu on bond market integration and investor portfolio allocations," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4742837, Tilburg University.
  5. Balli, Faruk & Basher, Syed Abul & Ozer-Balli, Hatice, 2010. "From home bias to Euro bias: Disentangling the effects of monetary union on the European financial markets," Journal of Economics and Business, Elsevier, vol. 62(5), pages 347-366, September.
  6. Ulf Söderström, 2010. "Reevaluating Swedish Membership in the European Monetary Union: Evidence from an Estimated Model," NBER Chapters, in: Europe and the Euro, pages 379-414 National Bureau of Economic Research, Inc.

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