IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Portfolio diversification and the cross-sectional distribution of foreign investment

Listed author(s):
  • Alexandra M. Tabova
Registered author(s):

    In this paper I explore the role of portfolio diversification in explaining the distribution of foreign investment across countries. I capture the portfolio diversification motive by a measure of country-specific riskiness, “covariance risk”, which I construct as how countries' growth rates covary with the stochastic discount factor of a representative international investor. My key new empirical finding is a strong and significant correlation between this new measure of country riskiness and foreign investment allocations. Less risky countries, i.e. countries whose growth rates are more highly correlated with the investor's stochastic discount factor, receive larger investment shares than more risky countries. I interpret this result as evidence that investors do take into account diversification opportunities, not only for portfolio investment decisions, but also for foreign direct investment decisions. My empirical results confirm the theoretical predictions of standard portfolio allocation models.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.federalreserve.gov/pubs/ifdp/2013/1091/default.htm
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/ifdp/2013/1091/ifdp1091.pdf
    Download Restriction: no

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1091.

    as
    in new window

    Length:
    Date of creation: 2013
    Handle: RePEc:fip:fedgif:1091
    Contact details of provider: Postal:
    20th Street and Constitution Avenue, NW, Washington, DC 20551

    Web page: http://www.federalreserve.gov/

    More information through EDIRC

    Order Information: Web: http://www.federalreserve.gov/pubs/ifdp/order.htm

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Pierpaolo Benigno & Salvatore Nisticò, 2009. "International Portfolio Allocation under Model Uncertainty," NBER Working Papers 14734, National Bureau of Economic Research, Inc.
    2. Mankiw, N, 1987. "Government Purchases and Real Interest Rates," Scholarly Articles 2624457, Harvard University Department of Economics.
    3. repec:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g708n2m4m is not listed on IDEAS
    4. Alexandra Tabova & Craig Burnside, 2010. "Risk, Volatility, and the Global Cross-Section of Growth Rates," 2010 Meeting Papers 1121, Society for Economic Dynamics.
    5. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2000. "Country portfolios," Economics Working Papers 913, Department of Economics and Business, Universitat Pompeu Fabra.
    6. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
    7. Kim, Dongcheol, 1995. " The Errors in the Variables Problem in the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(5), pages 1605-1634, December.
    8. Hnatkovska, Viktoria, 2010. "Home bias and high turnover: Dynamic portfolio choice with incomplete markets," Journal of International Economics, Elsevier, vol. 80(1), pages 113-128, January.
    9. V.N. Balasubramanyam, 2008. "Foreign Direct Investment," Chapters, in: International Handbook of Development Economics, Volumes 1 & 2, chapter 39 Edward Elgar Publishing.
    10. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan.
    11. Giovanni Ferri, 2004. "More analysts, better ratings: Do rating agencies invest enough in less developed countries?," Journal of Applied Economics, Universidad del CEMA, vol. 7, pages 77-98, May.
    12. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2008. "Governance matters VII : aggregate and individual governance indicators 1996-2007," Policy Research Working Paper Series 4654, The World Bank.
    13. Ricardo Pinheiro Alves, 2008. "Behavioural Determinants Of Foreign Direct Investment," GEE Papers 0008, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Dec 2008.
    14. Coeurdacier, Nicolas & Guibaud, Stéphane, 2011. "International portfolio diversification is better than you think," Journal of International Money and Finance, Elsevier, vol. 30(2), pages 289-308, March.
    15. Coeurdacier, Nicolas, 2006. "Do Trade Costs in Goods Market Lead to Home Bias in Equities?," ESSEC Working Papers DR 06011, ESSEC Research Center, ESSEC Business School.
    16. Philipp Harms & Matthias Lutz, 2006. "Aid, Governance and Private Foreign Investment: Some Puzzling Findings for the 1990s," Economic Journal, Royal Economic Society, vol. 116(513), pages 773-790, 07.
    17. S. Lael Brainard, 1993. "A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration," NBER Working Papers 4269, National Bureau of Economic Research, Inc.
    18. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    19. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
    20. Nicolas Coeurdacier & Stéphane Guibaud, 2005. "A dynamic equilibrium model of imperfectly integrated financial markets," PSE Working Papers halshs-00590775, HAL.
    21. David W Loree & Stephen E Guisinger, 1995. "Policy and Non-Policy Determinants of U.S. Equity Foreign Direct Investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 26(2), pages 281-299, June.
    22. James R. Hines, Jr., 1995. "Forbidden Payment: Foreign Bribery and American Business After 1977," NBER Working Papers 5266, National Bureau of Economic Research, Inc.
    23. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    24. Philip R. Lane & Gian M Milesi-Ferretti, 2000. "External Capital Structure; Theory and Evidence," IMF Working Papers 00/152, International Monetary Fund.
    25. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-544, September.
    26. Asiedu, Elizabeth & Jin, Yi & Nandwa, Boaz, 2009. "Does foreign aid mitigate the adverse effect of expropriation risk on foreign direct investment?," Journal of International Economics, Elsevier, vol. 78(2), pages 268-275, July.
    27. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters, in: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472 World Scientific Publishing Co. Pte. Ltd..
    28. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    29. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    30. Eaton, Jonathan & Gersovitz, Mark, 1984. "A Theory of Expropriation and Deviations from Perfect Capital Mobility," Economic Journal, Royal Economic Society, vol. 94(373), pages 16-40, March.
    31. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2000. "External Capital Structure: Theory and Evidence," CEPR Discussion Papers 2583, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:1091. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.