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Bilateral Capital Flows: Transaction Patterns and Gravity

Author

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  • Rogelio Mercado Jr.

    () (South East Asian Central Banks (SEACEN) Research and Training Centre)

Abstract

Holdings of cross-border bilateral assets are highly responsive to information frictions, market size, transaction costs, and trade ties. But empirical support using transactions data are constrained by the lack of comprehensive bilateral capital flows data covering large sample of economies for several years across investment and investor types. One expects that as information frictions weaken, transaction costs decline, and trade links strengthen, financial transactions between two economies will rise. This paper tests this hypothesis. Using bilateral Financial Accounts data from the Regional Balance of Payments Statistics of 10 advanced economies—yielding an unbalanced panel with 182 country pairs—for 2000-2016, the results provide strong evidence on the significance of information frictions, bilateral trade, transaction costs, and market size on bilateral capital flows. However, the findings show varying sensitivities of domestic and foreign investors to information asymmetries and trade ties. Moreover, investors appear to be more responsive to domestic transaction costs and foreign market size effects, than the converse. This study demonstrates an application of using bilateral capital flows data in revealing the patterns of international financial market segmentation still prevailing in cross-border financial transactions.

Suggested Citation

  • Rogelio Mercado Jr., 2018. "Bilateral Capital Flows: Transaction Patterns and Gravity," Trinity Economics Papers tep0218, Trinity College Dublin, Department of Economics, revised Feb 2018.
  • Handle: RePEc:tcd:tcduee:tep0218
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    File URL: https://www.tcd.ie/Economics/TEP/2018/TEP0218.pdf
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    Cited by:

    1. Rogelio Mercado Jr., 2018. "Bilateral Capital Flows: Gravity, Push, and Pull," Trinity Economics Papers tep0818, Trinity College Dublin, Department of Economics.

    More about this item

    Keywords

    bilateral capital flows; gravity; asset trade; information frictions;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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