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Decomposing the U.S. External Returns Differential

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

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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15077.

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Date of creation: Jun 2009
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Publication status: published as Curcuru, S., T. Dvorak, and F. Warnock, 2010. "Decomposing the U.S. External Returns Differential." Journal of International Economics 80: 22-32.
Handle: RePEc:nbr:nberwo:15077

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Citations

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Cited by:
  1. 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.
  2. Masahiro Endoh, 2012. "Return Differentials of Foreign Investment among OECD Countries," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-016, Keio/Kyoto Joint Global COE Program.
  3. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2013. "On Returns Differentials," NBER Working Papers 18866, National Bureau of Economic Research, Inc.
  4. Matteo Maggiori, 2012. "Financial Intermediation, International Risk Sharing, and Reserve Currencies," 2012 Meeting Papers 146, Society for Economic Dynamics.
  5. Linda Goldberg, 2011. "The international role of the dollar: Does it matter if this changes?," Staff Reports 522, Federal Reserve Bank of New York.
  6. Matteo Maggiori, 2013. "The U.S. Dollar Safety Premium," 2013 Meeting Papers 75, Society for Economic Dynamics.

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