Bilateral Capital Flows: Transaction Patterns and Gravity

Abstract

Holdings of cross-border bilateral assets are highly responsive to information frictions, market size, transaction costs, and trade ties. But empirical support using transactions data are constrained by the lack of comprehensive bilateral capital flows data covering large sample of economies for several years across investment and investor types. One expects that as information frictions weaken, transaction costs decline, and trade links strengthen, financial transactions between two economies will rise. This paper tests this hypothesis. Using bilateral Financial Accounts data from the Regional Balance of Payments Statistics of 10 advanced economies-yielding an unbalanced panel with 182 country pairs-for 2000-2016, the results provide strong evidence on the significance of information frictions, bilateral trade, transaction costs, and market size on bilateral capital flows. However, the findings show varying sensitivities of domestic and foreign investors to information asymmetries and trade ties. Moreover, investors appear to be more responsive to domestic transaction costs and foreign market size effects, than the converse. This study demonstrates an application of using bilateral capital flows data in revealing the patterns of international financial market segmentation still prevailing in cross-border financial transactions.

Financial flows centrality: Empirical evidence using bilateral capital flows

“…The focus on both global and domestic factors captures both network systemic and node idiosyncratic timevarying factors that describe an economy's financial centrality within a network. Using a dataset on bilateral capital flows from 10 advanced reporting economies (Mercado, 2018b), we use the eigenvector centrality measure as an indicator of financial centrality for 64 advanced and emerging economies from 2000-16, disaggregated by different types of investments and investor residency. Our financial centrality measure combines the connections an economy weighted by the volume of transactions as well as the importance of its counterparties in the global financial network.…”

“…To examine the determinants of financial centrality, this paper uses the bilateral capital flows dataset of Mercado (2018b). The main advantage of using bilateral capital flows data is that it offers greater understanding of financial network centrality as the underlying bilateral financial flows data is an aggregated total of all types of financial investment transactions including greenfield; mergers and acquisitions; portfolio securities; equities; loans; currency and deposits; trade credits and advances; and other types of payables and investments.…”

“…To address the research question in this paper, we proceed as follows. First, we use bilateral capital flows data for 10 advanced reporting economies from Mercado (2018b), yielding 206 bilateral pairs for 2000-2016. The bilateral capital flows data include financial assets and liabilities across different functional categories of the Financial Account Balance; and they capture annual bilateral financial transactions as opposed to bilateral financial holdings.…”

“…Mercado's (2018b) bilateral capital flows data are taken from Balance of Payments Statistics of 10 reporting central banks or statistics agencies, including Austria (Österreichische Nationalbank), Canada (Statistics Canada), Denmark (Danmarks Nationalbank), Germany (Deutsche Bundesbank), Japan (Bank of Japan), Korea (Bank of Korea), Netherlands (De Nederlandsche Bank), New Zealand (Stats NZ), Spain (Banco de España) and the United States (Bureau of Economic Analysis). 5 Values are mostly presented in local currency units.…”

Financial Flows Centrality: Empirical Evidence using Bilateral Capital Flows

“…More importantly, the data pertain to the financial transactions between two economies, which represent actual financial flows between two nodes, as opposed to proxy measures of interconnectedness such as asset price correlations. Mercado's (2018b) bilateral capital flows data are taken from Balance of Payments Statistics of 10 reporting central banks or statistics agencies, including Austria (Österreichische Nationalbank), Canada (Statistics Canada), Denmark (Danmarks Nationalbank), Germany (Deutsche Bundesbank), Japan (Bank of Japan), Korea (Bank of Korea), Netherlands (De Nederlandsche Bank), New Zealand (Stats NZ), Spain (Banco de España) and the United States (Bureau of Economic Analysis). 5 Values are mostly presented in local currency units.…”