International Investment Patterns

Abstract

International investment patterns are an important indicator of financial linkages and integration. Country portfolios indicate how nations hold their financial wealth and thus provide information about the productivity and risk of a nation’s economic and financial sectors. This chapter reviews the literature on the composition of country portfolios and examines the asset and liability positions across countries. Many potential explanations of the observed heterogeneity in portfolios are reviewed by examining the extant literature on capital flows and asset allocation models. The chapter also looks at the role of fundamentals and informational asymmetries in restricting international capital flows, and how asset return predictability and investors’ risk aversion affect investors’ asset allocation.