Working Paper: NBER ID: w18697
Authors: Livia Chiu; Barry Eichengreen; Arnaud J. Mehl
Abstract: We analyze patterns of bilateral financial investment using data on US investors' holdings of foreign bonds. We document a "history effect" in which the pattern of holdings seven decades ago continues to influence holdings today. 10 to 15% of the cross-country variation in US investors' foreign bond holdings is explained by holdings 70 years ago, plausibly reflecting fixed costs of market entry and exit together with endogenous learning. This effect is twice as large for bonds denominated in currencies other than the dollar, suggesting the existence of even higher fixed costs of initiating US foreign investment in such currencies. Our findings point to history and path dependence as key sources of financial market segmentation.
Keywords: international finance; gravity model; financial investment; path dependence; historical effects
JEL Codes: F30; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US investors' foreign bond holdings in 1943 (G15) | US investors' foreign bond holdings in 2010 (G15) |
| US investors' foreign bond holdings in 1943 (G15) | US investors' foreign bond holdings in 2010 (non-dollar bonds) (G15) |
| historical bond holdings (G12) | current investments (G31) |