International investment positions and risk sharing: an empirical analysis on the coordinated portfolio investment survey

By using data from all available waves of the IMF Coordinated Portfolio In- vestment Surveys, we explore the dynamics of the determinants of cross portfolio investments. The main aim of our analysis, however, is to understand whether a diversification motive can also be found, among the various determinants. We find strong evidence that, indeed, the correlation between the idiosyncratic components of gdp growth, as well as the correlation between stock returns between pair of coun- tries, that we consider as proxies for diversification, are relevant to explain bilateral portfolio holdings, when unobserved heterogeneity is properly taken into account, by means of a fixed effect, panel estimation (where the fixed effects refer to pair of countries, rather than countries in isolation). Interestingly, the same results, cannot be retrieved from cross section estimations. It also turns out that the diversification motive is less relevant, if at all, in choosing whether or not to invest in a particular area.