Working Paper: NBER ID: w15077
Authors: Stephanie E. Curcuru; Tomas Dvorak; Francis E. Warnock
Abstract: 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.
Keywords: returns differential; foreign investors; portfolio reallocation; market timing
JEL Codes: F21; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| portfolio reallocation (G11) | returns (Y60) |
| poor timing of foreign investors (F21) | U.S. external returns differential (F29) |
| high equity weight when U.S. equity prices have peaked (G12) | poor timing of foreign investors (F21) |
| low equity weight when U.S. equity prices are poised to rise (G12) | poor timing of foreign investors (F21) |
| active trading (G15) | poor timing of foreign investors (F21) |
| poor timing of foreign investors (F21) | lower returns of foreign investors (F21) |