Net Capital Flows and Portfolio Diversification

23 Pages Posted: 23 Oct 2019

See all articles by Constantin Bürgi

Constantin Bürgi

St. Mary's College of Maryland

Vida Bobic

George Washington University

Min Wu

George Washington University

Date Written: 2019

Abstract

This paper presents a new explanation for the sustained pattern of international net capital flows by modifying the standard consumption capital asset pricing model (CCAPM) to create net capital flows beyond the initial period. In addition to the well established link between asset returns and the cyclical correlation between countries in standard CCAPM models, our model links asset flows to the cyclical correlation. In particular, the model predicts that a country that has a low correlation with the global cycle should see net capital inflows. We provide strong empirical evidence in support of this link and a 0.1 increase in the correlation leads to a 0.5-0.7 percentage point decrease in the net capital inflows as a % of GDP.

Keywords: net capital flows, productivity, growth, portfolio diversification

JEL Classification: F360, F430

Suggested Citation

Bürgi, Constantin and Bobic, Vida and Wu, Min, Net Capital Flows and Portfolio Diversification (2019). CESifo Working Paper No. 7883, Available at SSRN: https://ssrn.com/abstract=3473599

Constantin Bürgi (Contact Author)

St. Mary's College of Maryland ( email )

St. Mary's City, MD 20686
United States

Vida Bobic

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

Min Wu

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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