Location of Repository

Do international portfolio investors follow firms’ foreign investment decisions?

By Roberto A. De Santis and Paul Ehling

Abstract

We analyze the interlinkages between foreign direct investment (FDI) and foreign portfolio investment (FPI) between Germany and the major economies. First, we show that Tobin’s q helps explaining the variation of the growth rate of the stock of FDI. Second, we show that foreign and the home stock market returns explain the ariation of the growth rate of the stock of FPI. Most importantly, we find that information about foreign fundamentals is revealed via direct investment. In other words, FDI transactions measured by fitted growth rates of the stock of FDI help explaining current growth rates of the stock of FPI. To our knowledge this observation is the first unambiguous evidence that international portfolio investors follow firms’ expected foreign investment decisions. JEL Classification: F21, F23, G11, G15and Information Spillovers, Foreign Direct Investment, Foreign Portfolio Investment, Investor Heterogeneity, Tobin’s q

OAI identifier:

Suggested articles

Preview

Citations

  1. (2007). 759 “Linear-quadratic approximation, external habit and targeting rules” by
  2. (2007). 761 “External imbalances and the US current account: how supply-side changes affect an exchange rate adjustment”
  3. (2007). 762 “Patterns of current account adjustment: insights from past experience” by B. Algieri
  4. (2007). 764 “Robust monetary policy with imperfect knowledge” by A. Orphanides
  5. (2007). 767 “Explaining monetary policy in press conferences”
  6. (2007). 768 “A new approach to measuring competition in the loan markets of the euro area” by
  7. (2007). 770 “Welfare implications of Calvo vs. Rotemberg pricing assumptions” by
  8. (2007). 771 “Policy rate decisions and unbiased parameter estimation in typical monetary policy rules” by
  9. (2007). 773 “Exchange rate volatility and growth in small open economies at the EMU periphery” by
  10. (2007). 776 “Insights gained from conversations with labor market decision makers” by
  11. (2007). 777 “Downward nominal wage rigidity in the OECD”
  12. (2007). 780 “Dynamics and monetary policy in a fair wage model of the business cycle” by
  13. (2007). 781 “Wage inequality in Spain: recent developments”
  14. (2007). 783 “The cyclicality of effective wages within employer-employee matches – evidence from German panel data” by S.
  15. (2007). 784 “Understanding the dynamics of labor shares and inflation”
  16. (2007). 785 “Aggregating Phillips curves” by
  17. (2007). 786 “The economic impact of merger control: what is special about banking?” by
  18. (2007). 787 “Finance and growth: a macroeconomic assessment of the evidence from a European angle” by
  19. (2007). 789 “Modeling the impact of external factors on the euro area’s HICP and real economy: a focus on pass-through and the trade balance” by
  20. (2007). 790 “Asset prices, exchange rates and the current account” by
  21. (2007). 791 “Inquiries on dynamics of transition economy convergence in a two-country model” by
  22. (2007). 792 “Euro area market reactions to the monetary developments press release”
  23. (2007). 793 “Structural econometric approach to bidding in the main refinancing operations of the Eurosystem” by
  24. (2007). 794 “(Un)naturally low? Sequential Monte Carlo tracking of the US natural interest rate” by
  25. (2007). 795 “Assessing the Impact of a change in the composition of public spending: a DSGE approach” by
  26. (2007). 796 “The impact of exchange rate shocks on sectoral activity and prices in the euro area” by
  27. (2007). 799 “Monetary policy shocks in a two-sector open economy: an empirical study” by
  28. (2007). 800 “Is the corporate bond market forward looking?” by
  29. (2007). 802 “Investigating time-variation in the marginal predictive power of the yield spread” by
  30. (2007). 803 “Optimal monetary policy in an estimated DSGE for the euro area” by
  31. (2007). 804 “Growth accounting for the euro area: a structural approach” by
  32. (2007). 805 “The pricing of risk in European credit and corporate bond markets” by
  33. (2007). 806 “State-dependency and firm-level optimization: a contribution to Calvo price staggering” by
  34. (2007). 807 “Cross-border lending contagion in multinational banks” by A. Derviz
  35. (2007). 809 “Is the new Keynesian Phillips curve flat?” by
  36. (2007). 810 “Inflation persistence: euro area and new
  37. (2007). 811 “Instability and nonlinearity in the euro area Phillips curve” by
  38. (2007). 812 “The uncovered return parity condition” by
  39. (2007). 813 “The role of the exchange rate for adjustment in boom and bust episodes” by
  40. (2007). 814 “Choice of currency in bond issuance and the international role of currencies” by
  41. (2007). 815 “Do international portfolio investors follow firms’ foreign investment decisions?” by
  42. (2007). A 3 ) Expressions (A2) and (A3) should explain respectively the growth rates of domestic investment and FDI activities. Substituting (A2) and (A3) into (5) gives the investment flow: 32 ECB Working Paper Series No 815
  43. (2000). A Model of Dynamic Equilibrium Asset Pricing with Heterogeneous Beliefs and Extraneous Risk,
  44. (2003). A Monte Carlo Method for Optimal Portfolios,
  45. (2006). An Information-Based Trade Off between Foreign Direct Investment and Foreign Portfolio Investment,
  46. (2007). and long-run tax elasticities: the case of the Netherlands” by
  47. (2007). and when do markets tip? Lessons from the Battle of the Bund” by E. Cantillon
  48. (2004). Are Daily Cross-Border Equity Flows Pushed or Pulled?,
  49. (1996). Asset Pricing with Heterogeneous Consumers,
  50. (2007). Asymmetric Demand Information and Foreign Direct Investment,
  51. (1977). Capital Asset Prices with Heterogeneous Beliefs,
  52. (2002). Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices,
  53. (2005). Do Heterogeneous Beliefs Matter for Asset Pricing?,
  54. (1998). Effects of Financial Innovations on Market Volatility when Beliefs are Heterogeneous,
  55. (2004). Endogenous Market Structures and the Gains from Foreign Direct Investment,
  56. (1997). Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment,
  57. (2001). General Equilibrium Approaches to the Multinational Firm: A Review of Theory and Evidence,
  58. (1991). Interactions Between Domestic and Foreign Investment,
  59. (2006). International Equity Flows and Returns: A quantitative Equilibrium Approach, forthcoming Review of Economic Studies.
  60. (1994). Intertemporal Asset Pricing with Heterogeneous Beliefs,
  61. (1969). Lifetime Portfolio Selection under Uncertainty: The Continuous Time Case,
  62. (2007). misspecification, the equilibrium natural interest rate and the equity premium” by
  63. (2002). Multinational Firms and the Theory of International Trade,
  64. (2002). No Contagion, Only Interdependence: Measuring Stock Market Comovements,
  65. (1995). On the Determinants of Euro Area FDI to the United States: The Knowledge-Capital-Tobin’s q Framework, ECB Working Paper Series,
  66. (2007). search and the cyclical dynamics of the labor market” by
  67. (2007). Source: Deutsche Bundesbank, Thomson DataStream and own calculations. 42 ECB Working Paper Series No
  68. (2002). State-Price Densities under Heterogeneous Beliefs, the Smile Effect, and Implied Risk Aversion,
  69. (2001). structures or monetary policies? The euro area and US after
  70. (2005). The determinants of Cross-Border Equity Flows,
  71. (2007). The dynamic behaviour of budget components and output”
  72. (1995). The Malliavin Calculus and Related Topics,
  73. (2001). The mean of y is updated according to (Lipster and Shiryayev,
  74. (2001). The Portfolio Flows of International Investors,
  75. (1996). The Term Structure of Interest Rates in a Pure Exchange Economy with Heterogeneous Investors,
  76. (1980). This figure displays the growth rate of the stock of FDI. The data are calculated in Deutschmark from
  77. (1982). Tobin's Marginal q and Average q:
  78. (1989). Two-Person Dynamic Equilibrium in the Capital Market, The Review of
  79. (2007). Unique Symptoms of Japanese Stagnation: An Equity Market Perspective,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.