Working Paper: CEPR ID: DP4499
Authors: Philip R. Lane; Gian Maria Milesi-Ferretti
Abstract: We provide a systematic analysis of bilateral, source and host factors driving portfolio equity investment across countries, using newly released data on international equity holdings at the end of 2001. We develop a model that links bilateral equity holdings to bilateral trade in goods and services and find that the data strongly support such a correlation. Larger bilateral positions are also associated with proxies for informational proximity. We further document that the scale of aggregate foreign equity asset and liability holdings is larger for richer countries and countries with more developed stock markets.
Keywords: gravity; international portfolio equity investment; international trade
JEL Codes: F21; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger bilateral trade volumes (F10) | Higher bilateral equity holdings (G32) |
| Cultural and institutional proximity (F55) | Higher bilateral equity holdings (G32) |
| Size of domestic stock markets (G15) | Level of foreign equity liabilities (G32) |
| Higher trade volumes (F19) | Reduced informational frictions (D83) |