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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.

Suggested Citation

  • Roberto A. De Santis, 2010. "The Geography of International Portfolio Flows, International CAPM, and the Role of Monetary Policy Frameworks," International Journal of Central Banking, International Journal of Central Banking, vol. 6(2), pages 147-197, June.
  • Handle: RePEc:ijc:ijcjou:y:2010:q:2:a:6
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    Citations

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    Cited by:

    1. Martin Scheicher, 2010. "“Return-free risk”? Market pricing in credit risk markets," Research Bulletin, European Central Bank, vol. 11, pages 7-8.
    2. 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.
    3. Holinski, Nils & Kool, Clemens J.M. & Muysken, Joan, 2012. "The impact of international portfolio composition on consumption risk sharing," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1715-1728.
    4. Roberto Santis, 2015. "Quantity theory is alive: the role of international portfolio shifts," Empirical Economics, Springer, vol. 49(4), pages 1401-1430, December.
    5. 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.
    6. Gelman, Maria & Jochem, Axel & Reitz, Stefan & Taylor, Mark P., 2015. "Real financial market exchange rates and capital flows," Journal of International Money and Finance, Elsevier, vol. 54(C), pages 50-69.
    7. Gianni Amisano & Andreas Beyer & Michele Lenza, 2010. "Enhancing monetary analysis," Research Bulletin, European Central Bank, vol. 11, pages 2-6.
    8. Geoff Kenny, 2010. "Macroeconomic forecasting: can forecast combination help?," Research Bulletin, European Central Bank, vol. 11, pages 9-12.

    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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