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The growing importance of investment funds in capital flows

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  • Richard Schmidt
  • Pinar Yesin

Abstract

In this paper, we first document the growing importance of foreign-domiciled investment funds in countries' portfolio liabilities over time and then show empirical evidence that cross-border fund flows are coincident with asset price movements. To measure the external liabilities of countries to foreign-domiciled funds, we complement conventional balance-of-payments and international investment position data with granular and real-time data on fund flows. We find that the external exposure of countries to investment funds has been steadily increasing both for advanced and emerging market economies. Furthermore, we find that this increased external exposure is coincident with higher exchange rate fluctuations, lower bond yields and higher stock returns. Because sustainability-themed investment funds are growing faster than conventional investment funds, we also focus on Environmental, Social and Governance (ESG) funds and construct an index of sustainable finance that can distinguish between its domestic and cross- border components. Our index reveals that ESG funds domiciled in European countries tend to invest predominantly in domestic markets, whereas ESG investment in emerging market economies to a large extent originates from foreign-domiciled investment funds.

Suggested Citation

  • Richard Schmidt & Pinar Yesin, 2022. "The growing importance of investment funds in capital flows," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 72(01), pages 1-40, December.
    • Handle: RePEc:usg:auswrt:2022:72:01:1-40
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    Cited by:

    1. Andreas M. Fischer & Dr. Pinar Yesin, 2023. "The kindness of strangers: Brexit and bilateral financial linkages," Working Papers 2023-02, Swiss National Bank.
    2. Graziano, Marco & Habib, Maurizio Michael, 2024. "Mutual funds and safe government bonds: do returns matter?," Working Paper Series 2931, European Central Bank.

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    More about this item

    Keywords

    investment funds; portfolio investment; fund flows; ESG funds; financial markets;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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