Grey Zones in Global Finance: The Distorted Geography of Cross-Border Investments

Abstract

Complex cross-border financial structures inflate measured international investment stocks in tax havens. Using a standard gravity framework, we estimate that about 40\% of global assets (FDI, portfolio equity and debt) are `abnormal' -- unexplained -- and operated through tax havens. Abnormal stocks are increasing over time and concentrated in a limited number of jurisdictions. Six jurisdictions including three European countries are the largest contributors: Cayman, Bermuda, Luxembourg, Hong Kong, Ireland and the Netherlands. Interestingly, the Luxleaks in 2014 do not appear to have diverted cross-border investments away.

Keywords: Capital openness, Cross-border investments, Gravity Equation, tax havens

JEL Classification: F23, G21, H22, H32