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The geography of international portfolio flows, international CAPM and the role of monetary policy frameworks

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Abstract

Using bilateral data on international equity and bond flows, we find that 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. Moreover, over the turbulent 1998-2001 period characterised 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. Country's shares in the world market portfolio, home bias, initial degree of misallocation across countries, past returns, diversification benefits and EMU can explain 35-40% of the total variation in equity and bond asset flows. JEL Classification: C13, C21, F37, G11.

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Paper provided by European Central Bank in its series Working Paper Series with number 678.

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Length: 47 pages
Date of creation: Sep 2006
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Handle: RePEc:ecb:ecbwps:20060678

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Keywords: Capital flows; Home bias; Risk diversification; EMU; Monetary policy.;

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Citations

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Cited by:
  1. 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.
  2. Van Pée, Rosanne & De Moor, Lieven, 2012. "Bond and equity home bias and foreign bias: An international study," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/347316, Katholieke Universiteit Leuven.
  3. Pot Erik & Flesch János & Peeters Ronald & Vermeulen Dries, 2009. "Dynamic Competition with Consumer Inertia," Research Memoranda 037, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
  4. 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.
  5. Ulf Söderström, 2008. "Re-Evaluating Swedish Membership in EMU: Evidence from an Estimated Model," NBER Working Papers 14519, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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," MPRA Paper 22430, University Library of Munich, Germany.
  8. Nils Holinski & Joan Muysken & Clemens Kool, 2011. "The Impact of International Portfolio Composition on Consumption Risk Sharing," Working Papers 11-20, Utrecht School of Economics.
  9. Holinski, Nils, 2010. "The wealth of nations: global imbalances and adjustments in a financially integrated world," Open Access publications from Maastricht University urn:nbn:nl:ui:27-24477, Maastricht University.

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