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Net Capital Flows and Portfolio Diversification

Author

Listed:
  • Constantin Bürgi
  • Vida Bobic
  • Min Wu

Abstract

This paper presents a new explanation for the sustained pattern of international net capital flows by modifying the standard consumption capital asset pricing model (CCAPM) to create net capital flows beyond the initial period. In addition to the well established link between asset returns and the cyclical correlation between countries in standard CCAPM models, our model links asset flows to the cyclical correlation. In particular, the model predicts that a country that has a low correlation with the global cycle should see net capital inflows. We provide strong empirical evidence in support of this link and a 0.1 increase in the correlation leads to a 0.5-0.7 percentage point decrease in the net capital inflows as a % of GDP.

Suggested Citation

  • Constantin Bürgi & Vida Bobic & Min Wu, 2019. "Net Capital Flows and Portfolio Diversification," CESifo Working Paper Series 7883, CESifo.
    • Handle: RePEc:ces:ceswps:_7883
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    References listed on IDEAS

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    More about this item

    Keywords

    net capital flows; productivity; growth; portfolio diversification;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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    This paper has been announced in the following NEP Reports:

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