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What drives gross flows in equity and investment fund shares in Luxembourg?

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  • Gabriele di Filippo

Abstract

The paper analyses gross portfolio investment flows in equity and investment fund shares (EIFS) in Luxembourg - a small open economy with a financial center - over the period 2002Q1- 2016Q3. The statistical analysis shows that gross EIFS flows exhibit similar patterns over time amongst resident investors and non-resident investors. However, the volatility of EIFS flows instigated by non-resident investors is larger than the volatility of EIFS flows initiated by resident investors. The graphical analysis provides evidence that gross EIFS flows switch between positive and negative growth cycles whose durations vary over time, depending on macroeconomic, financial and geopolitical shocks at the global level. In particular, gross EIFS flows correlate positively with stock returns and negatively with risk/uncertainty measures at the global level. Sudden and sharp increases (decreases) in gross EIFS flows concur with periods of bullish (bearish) equity markets and low (heightened) risk aversion. Econometric tests show that gross EIFS flows (including extreme movements) are driven by macroeconomic and financial variables at the global level. Eventually, a prediction exercise suggests that it is difficult to forecast extreme movements in gross EIFS flows based on global macroeconomic and financial variables.

Suggested Citation

  • Gabriele di Filippo, 2017. "What drives gross flows in equity and investment fund shares in Luxembourg?," BCL working papers 112, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp112
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    1. Valerio Della Corte & Stefano Federico & Alberto Felettigh, 2019. "Looking through cross-border positions in investment funds: evidence from Italy," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Are post-crisis statistical initiatives completed?, volume 49, Bank for International Settlements.

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    More about this item

    Keywords

    International finance; external statistics; balance of payments; equity and investment fund shares; gross flows; surges/flights; stops/retrenchments; graphical analysis; GMM estimation; discrete choice model; ROC analysis; prediction exercise;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F3 - International Economics - - International Finance
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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