International Portfolio Diversification: The Role of Risk and Return
This paper explores empirically the role of risk and return factors in the observed evolution of net foreign asset positions of a large number of industrial and developing economies. The paper adopts a dynamic approach in which investors’ portfolios adjust gradually to their long-run equilibrium, which is characterized by a standard Tobin-Markowitz framework. This equilibrium condition is estimated using a new data set on foreign assets and liabilities for a large number of industrial and developing countries spanning the period from 1965 to the present. The dynamic panel estimation procedure allows for unrestricted short-run heterogeneity across countries, using the Pooled Mean Group estimator of Pesaran, Shin, and Smith (1999). The empirical results lend considerable support to the model when applied to countries with low capital controls and/or high and upper-middle income. The results for countries with high capital controls and, especially, lower-income countries are less supportive of the stock equilibrium model.
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- Pesaran, M. Hashem & Smith, Ron, 1995.
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- Lane, Philip R. & Milesi-Ferretti, Gian Maria, 1999.
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2231, C.E.P.R. Discussion Papers.
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- Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers 20014, Trinity College Dublin, Department of Economics.
- Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics.
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dp0044, Centre for Economic Performance, LSE.
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9612, Faculty of Economics, University of Cambridge.
- Pesaran, M Hashem, 1997. "The Role of Economic Theory in Modelling the Long Run," Economic Journal, Royal Economic Society, vol. 107(440), pages 178-91, January.
- Catherine A. Pattillo & Andrew Berg, 1998.
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98/154, International Monetary Fund.
- Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, March.
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