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Unveiling the drivers of portfolio equity and bond investment in the European Union: The interplay of tax havens and gravity factors

Author

Listed:
  • Mariam Camarero

    ((University Jaume I and INTECO)

  • Alejandro Muñoz

    (University of València)

  • Cecilio Tamarit

    (University of València and INTECO)

Abstract

This paper examines the determinants of portfolio equity and bond investment in the European Union. We estimate the impact of different drivers typical of the gravity model developed by Okawa and van Wincoop (2012). A notable aspect of our study is that it accounts for the effects of tax havens through the recent database of Coppola et al. (2021). Another distinctive trait of our paper is that we model bilateral and multilateral resistance measured as financial restrictions between the country pair (bilateral) and relative to the rest of the world (multilateral). Our findings suggest that gravity variables (distance, economic size, and resistance), as well as historical links and global risk, explain portfolio holdings allocation. Our extended gravity model also captures the positive effect of government quality and financial development on portfolio equity and bonds. Given the differences in nature and risk between assets, we also compare the results for portfolio equity and bonds; we find that while portfolio equity is more mobile, portfolio debt tends to be invested in neighboring countries; more specifically, EU debt tends to remain in the EU. Our results also suggest that portfolio equity is more affected by global risk and multilateral financial restrictions. Finally, our comparative analysis using the IMF CPIS database (constructed under the residence principle) shows that not accounting for tax havens underestimates the gravity and fundamental factors explaining portfolio equity and bonds holdings investment.

Suggested Citation

  • Mariam Camarero & Alejandro Muñoz & Cecilio Tamarit, 2024. "Unveiling the drivers of portfolio equity and bond investment in the European Union: The interplay of tax havens and gravity factors," Working Papers 2024.7, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2024.7
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    References listed on IDEAS

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    1. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g708pipbp is not listed on IDEAS
    2. Carol Bertaut & Beau Bressler & Stephanie E Curcuru, 2019. "Globalization and the geography of capital flows," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Are post-crisis statistical initiatives completed?, volume 49, Bank for International Settlements.
    3. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g708pipbp is not listed on IDEAS
    4. Krzysztof Beck, 2021. "Capital mobility and the synchronization of business cycles: Evidence from the European Union," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 1065-1079, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Gravity; cross-border asset holdings; global frictions; international finance;
    All these keywords.

    JEL classification:

    • G - Financial Economics

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