Decomposing the U.S. External Returns Differential
Stephanie E. Curcuru
Federal Reserve Board
Francis E. Warnock
University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)
September 11, 2009
FRB International Finance Discussion Paper No. 977
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.
Number of Pages in PDF File: 47
Keywords: Returns differential, timing effect
JEL Classification: F21, F3
Date posted: September 30, 2009
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