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Correlation aversion in foreign direct investment

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  • Khotamov, Navruz
  • Jinji, Naoto

Abstract

Decisions under risk are often multidimensional, where the preferences of the investor depend on several factors. Investment theory implies that in the presence of different shocks, the correlation between these shocks is important. This study analyzes the relationship between the correlation of two shocks and foreign direct investment (FDI). The sources of shocks, in this study, are related to demand and exchange rate in the destination market. Constructing large panel data on industry-level FDI, we analyze FDI under correlation risk. We show that in the presence of two shocks, industry-level FDI flows exhibit correlation aversion and that the correlation of two distinct shocks explains significant variation in geographic allocation of FDI at the industry-level.

Suggested Citation

  • Khotamov, Navruz & Jinji, Naoto, 2025. "Correlation aversion in foreign direct investment," Finance Research Letters, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:finlet:v:74:y:2025:i:c:s1544612324017574
    DOI: 10.1016/j.frl.2024.106728
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    Keywords

    Correlation aversion; FDI; Exchange rate shocks; Demand shocks;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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