What drives international portfolio flows?

Abstract

This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent AbstractUnderstanding what drives international portfolio ‡ows has important policy implications for countries wishing to exert some control on the size, direction and volatility of the ‡ows. This paper empirically assesses the relative contribution of common (push) and country-speci…c (pull) factors to the variation of bond and equity ‡ows from the US to 55 other countries. Using a Bayesian dynamic latent factor model, we …nd that more than 80% of the variation in bond and equity ‡ows is due to push factors from the US to other countries. Hence global economic forces seem to prevail over domestic economic forces in explaining movements in international portfolio ‡ows. The dynamics of push and pull factors can be partially explained by US and foreign economic fundamentals.

Macro-Financial Effects of Portfolio Flows: Malaysia's Experience

“…These results are in contrast to that reported in Forbes and Warnock (2012) and Sarno, Tsiakas, and Ulloa (2016) who found the global factors to be more influential than domestic forces in explaining movements in international portfolio flows.…”

“…On other hand Sarno, Tsiakas, and Ulloa (2016) found there is little regional variation in the relative contribution of push and pull factors among countries into a country. Some commonly identified pull factors are domestic macroeconomic conditions such as high interest rates, low inflation, growth potential, trade openness and financial sector development.…”

“…Sarno, Tsiakas, and Ulloa (2016) finds that the contribution of global economic variables to the variance of international portfolio flows to EMs is higher than the world average. asset prices and credit growth, which affect growth positively.…”

“…See, for example, Milesi-Ferretti and Tille (2011), Fratzscher (2011), Forbes and Warnock (2012, Ahmed and Zlate (2014), Cerutti, Claessens, and Puy (2015), Rey (2015), Koepke (2015) and Sarno, Tsiakas, and Ulloa (2016) among many others.…”

Findings of the recent literature on international capital flows

“…A first stream of empirical literature has relied on time series analysis and assessed the role of global factors via the identification of common components or co-movements of capital inflows to EMEs rather than identifying global push factors in an ad-hoc way Sarno et al, 2015;Byrne and Fiess, 2016; see Table 3). It is only once a global component has been identified that it is linked to global variables.…”