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Excess returns on net foreign assets: the exorbitant privilege from a global perspective

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  • Habib, Maurizio Michael
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    Abstract

    This paper studies net foreign assets and the differential returns between gross foreign assets and liabilities for a sample of 49 countries between 1981 and 2007. It shows that investment income is more important than capital gains in imparting a drift to net foreign assets over the long-run, whereas the latter dominate short-term dynamics. Excess returns on net foreign assets of the United States are indeed exorbitant from a global perspective, only occasionally matched by other countries and mainly accounted for by positive valuation effects. The role of the United States as levered investor did not contribute to its exorbitant privilege. The econometric panel analysis also fails to find a robust positive relationship between leverage and excess returns. Notably, instead, real exchange rate depreciations increase excess returns through capital gains, proportionally to the relative foreign currency exposure. Excess yields on investment income are positively associated with the country risk rating. JEL Classification: F30, F31, F36

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 1158.

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    Date of creation: Feb 2010
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    Handle: RePEc:ecb:ecbwps:20101158

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    Keywords: excess returns; exorbitant privilege; leverage; net foreign assets;

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    Cited by:
    1. Martin Schmitz, 2014. "Financial remoteness and the net external position," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 150(1), pages 191-219, February.
    2. Chudik, Alexander & Dieppe, Alistair & Ca' Zorzi, Michele, 2012. "Thousands of models, one story: current account imbalances in the global economy," Working Paper Series 1441, European Central Bank.
    3. Martin Evans, 2012. "International Capital Flows and Debt Dynamics," Working Papers gueconwpa~12-12-04, Georgetown University, Department of Economics.
    4. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2013. "On Returns Differentials," NBER Working Papers 18866, National Bureau of Economic Research, Inc.
    5. 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.
    6. Matteo Maggiori, 2013. "The U.S. Dollar Safety Premium," 2013 Meeting Papers 75, Society for Economic Dynamics.

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