Do Capital Flows Respond to Risk and Return?

46 Pages Posted: 20 Apr 2016  

César A. Calderón

Central Bank of Chile

Norman Loayza

World Bank - Research Department

Luis Servén

World Bank - Office of the Chief Economist; World Bank - Development Research Group (DECRG)

Date Written: March 2003

Abstract

This paper explores empirically the role of risk and return in the observed evolution of net foreign asset positions of industrial and developing economies. The paper adopts a dynamic approach in which investors' portfolios adjust gradually to their long-run equilibrium, defined by a standard Tobin-Markowitz framework. The parameters characterizing the long-run equilibrium are estimated using data on foreign assets and liabilities of a large number of industrial and developing countries spanning the period from 1965 to 1997. The paper employs a dynamic panel estimation procedure allowing for unrestricted short-run heterogeneity across countries, using the pooled mean group estimator recently developed by Pesaran, Shin, and Smith (1999). The empirical results lend considerable support to the model when applied to countries with low capital controls and/or high and upper-middle income. The results for countries with either high capital controls or low per capita income are less supportive of the stock equilibrium model for net foreign asset positions.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand international capital flows.

JEL Classification: F32, F37, G11

Suggested Citation

Calderón, César A. and Loayza, Norman and Servén, Luis, Do Capital Flows Respond to Risk and Return? (March 2003). World Bank Policy Research Working Paper No. 3059. Available at SSRN: https://ssrn.com/abstract=636421

Cesar A. Calderon (Contact Author)

Central Bank of Chile ( email )

Agustinas 1180
Santiago
Chile

Norman Loayza

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Luis Servén

World Bank - Office of the Chief Economist ( email )

Washington, DC 20433
United States
202-473-7451 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/research/bios/lserven.htm

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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