Gravity in International Finance

HKIMR Working Paper No. 07/2010

61 Pages Posted: 22 Jun 2010

See all articles by Yohei Okawa

Yohei Okawa

University of Virginia - Department of Economics

Eric van Wincoop

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 30, 2010

Abstract

The past decade has witnessed an explosion of papers estimating gravity equations for cross-border financial holdings. The aim of the paper is to develop a theoretical foundation for the empirical gravity literature applied to finance. The gravity specification is closely analogous to that developed for goods trade, even though it is based on a very different type of theory. We show how the theory can be used to estimate international financial frictions and conduct comparative statics analysis with respect to changes in these frictions. We use a dataset for cross-border equity holdings among 24 industrialized countries to illustrate these results.

Suggested Citation

Okawa, Yohei and van Wincoop, Eric, Gravity in International Finance (April 30, 2010). HKIMR Working Paper No. 07/2010, Available at SSRN: https://ssrn.com/abstract=1628043 or http://dx.doi.org/10.2139/ssrn.1628043

Yohei Okawa

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Eric Van Wincoop (Contact Author)

University of Virginia - Department of Economics ( email )

Rouss Hall 114
P.O. Box 400182
Charlottesville, VA 22904-4182
United States
804-924-3997 (Phone)
804-982-2904 (Fax)

National Bureau of Economic Research (NBER)

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