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International Portfolio Diversification: The Role of Risk and Return

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  • César Calderón
  • Norman Loayza
  • Luis Servén

Abstract

This paper explores empirically the role of risk and return factors in the observed evolution of net foreign asset positions of a large number of industrial and developing economies. The paper adopts a dynamic approach in which investors’ portfolios adjust gradually to their long-run equilibrium, which is characterized by a standard Tobin-Markowitz framework. This equilibrium condition is estimated using a new data set on foreign assets and liabilities for a large number of industrial and developing countries spanning the period from 1965 to the present. The dynamic panel estimation procedure allows for unrestricted short-run heterogeneity across countries, using the Pooled Mean Group estimator of 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 high capital controls and, especially, lower-income countries are less supportive of the stock equilibrium model.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 94.

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Date of creation: Apr 2001
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Handle: RePEc:chb:bcchwp:94

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  1. Donald Robertson & James Symons, 1991. "Some Strange Properties of Panel Data Estimators," CEP Discussion Papers dp0044, Centre for Economic Performance, LSE.
  2. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers 20014, Trinity College Dublin, Department of Economics.
  3. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  4. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? a Test," IMF Working Papers 98/154, International Monetary Fund.
  5. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
  6. Pesaran, M Hashem, 1997. "The Role of Economic Theory in Modelling the Long Run," Economic Journal, Royal Economic Society, vol. 107(440), pages 178-91, January.
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