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Investor Experiences and International Capital Flows

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  • Ulrike Malmendier
  • Demien Pouzo
  • Victoria Vanasco

Abstract

We propose a novel explanation for classic international macro puzzles regarding capital flows and portfolio investment, which builds on modern macro-finance models ofexperience-based belief formation. Individual experiences of past macroeconomic out-comes have been shown to exert a long-lasting influence on beliefs about future realizations, and to explain domestic stock-market investment. We argue that experience effects can explain the tendency of investors to hold an over proportional fraction of their equity wealth in domestic stocks (home bias), to invest in domestic equity markets in periods of domestic crises (retrenchment), and to withdraw capital from foreign equity markets in periods of foreign crises (fickleness). Experience-based learning generates additional implications regarding the strength of these puzzles in times of higher or lower economic activity and depending on the demographic composition of market participants. We test and confirm these predictions in the data.

Suggested Citation

  • Ulrike Malmendier & Demien Pouzo & Victoria Vanasco, 2019. "Investor Experiences and International Capital Flows," Working Papers 1163, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1163
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    References listed on IDEAS

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    Cited by:

    1. Forbes, Kristin J. & Warnock, Francis E., 2021. "Capital flow waves—or ripples? Extreme capital flow movements since the crisis," Journal of International Money and Finance, Elsevier, vol. 116(C).
    2. Lin, Anchor Y. & Lin, Yueh-Neng, 2021. "Market similarity and cross-border investment performance," Finance Research Letters, Elsevier, vol. 40(C).
    3. Zsoka Koczan & Alexander Plekhanov, 2024. "Scarred for Life? Recession Experiences, Beliefs and the State," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(4), pages 1074-1111, August.

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    More about this item

    Keywords

    experience effects; learning; asset prices; portfolio choice; Demographics;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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