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Decomposing the U.S. External Returns Differential

  • Stephanie E. Curcuru
  • Tomas Dvorak
  • Francis E. Warnock

We decompose the returns differential between U.S. portfolio claims and liabilities into the composition, return, and timing effects. Our most striking and robust finding is that foreigners exhibit poor timing when reallocating between bonds and equities within their U.S. portfolios. The poor timing of foreign investors--caused primarily by deliberate trading, not a lack of portfolio rebalancing--contributes positively to the U.S. external returns differential. We find no evidence that the poor timing is driven by mechanical reserve accumulation by emerging market countries; rather, it is driven almost entirely by the poor timing of rich, developed (mainly European) countries. Finally, while poor foreign timing appears to be persistent across subsamples, other terms in our decomposition (the composition and return effects and U.S. timing abroad), as well as the overall differential, are sometimes negative, sometimes positive, and usually indistinguishable from zero.

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File URL: http://www.nber.org/papers/w15077.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15077.

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Date of creation: Jun 2009
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Publication status: published as Curcuru, S., T. Dvorak, and F. Warnock, 2010. "Decomposing the U.S. External Returns Differential." Journal of International Economics 80: 22-32.
Handle: RePEc:nbr:nberwo:15077
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