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Decomposing the U.S. External Returns Differential

47 Pages Posted: 30 Sep 2009  

Stephanie E. Curcuru

Federal Reserve Board

Tomas Dvorak

Union College

Francis E. Warnock

University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)

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Date Written: September 11, 2009


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, timing effect

JEL Classification: F21, F3

Suggested Citation

Curcuru, Stephanie E. and Dvorak, Tomas and Warnock, Francis E., Decomposing the U.S. External Returns Differential (September 11, 2009). FRB International Finance Discussion Paper No. 977. Available at SSRN: or

Stephanie E. Curcuru (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Tomas Dvorak

Union College ( email )

Schenectady, NY 12308-3107
United States
518 388 8016 (Phone)

Francis E. Warnock

University of Virginia - Darden Business School ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-6076 (Phone)


National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138-5398

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