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Liquidity, Institutional Quality and the Composition of International Equity Outflows

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  • Itay Goldstein
  • Assaf Razin
  • Hui Tong

Abstract

We examine the choice between Foreign Direct Investment and Foreign Portfolio Investment at the level of the source country. Based on a theoretical model, we predict that (1) source countries with higher probability of aggregate liquidity crises export relatively more FPI than FDI, and (2) this effect strengthens as the source country's capital market transparency worsens. To test these hypotheses, we apply a dynamic panel model and examine the variation of FPI relative to FDI for 140 source countries from 1985 to 2004. Our key variable is the probability of an aggregate liquidity crisis, estimated from a Probit model, as proxied by episodes of economy-wide sales of external assets. Consistent with our theory, we find that the probability of a liquidity crisis has a strong effect on the composition of foreign equity investment. Furthermore, greater capital market opacity in the source country strengthens the effect of the crisis probability.

Suggested Citation

  • Itay Goldstein & Assaf Razin & Hui Tong, 2008. "Liquidity, Institutional Quality and the Composition of International Equity Outflows," NBER Working Papers 13723, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13723
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    References listed on IDEAS

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    Cited by:

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    2. Juliana D. Araujo & Povilas Lastauskas & Chris Papageorgiou, 2017. "Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(7), pages 1517-1554, October.
    3. Koralai Kirabaeva & Assaf Razin, 2009. "Composition of International Capital Flows: A Survey," NBER Working Papers 15599, National Bureau of Economic Research, Inc.
    4. Sarno, Lucio & Tsiakas, Ilias & Ulloa, Barbara, 2016. "What drives international portfolio flows?," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 53-72.
    5. Durnev, Art & Enikolopov, Ruben & Petrova, Maria & Santarosa, Veronica, 2015. "Politics, instability, and composition of international investment flows," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 299-324.
    6. Koralai Kirabaeva & Assaf Razin, 2010. "Composition of Capital Flows: A Survey," NBER Working Papers 16492, National Bureau of Economic Research, Inc.
    7. Bárbara Ulloa & Carlos Saavedra & Carola Moreno, 2015. "A Microstructure Approach to Gross Portfolio Inflows. The Case of Chile," Working Papers Central Bank of Chile 760, Central Bank of Chile.

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    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F3 - International Economics - - International Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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