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Sovereign risk and international portfolio dynamics

Author

Listed:
  • Tatiana Didier

    (World Bank)

  • Sergio Schmukler

    (World Bank)

  • Aitor Erce

    (Banco de España)

  • Fernando Broner

    (CREI and Universitat Pompeu Fabra)

Abstract

In this paper we analyze the behavior of international portfolios in periods of financial turmoil, both theoretically and empirically. On the one hand, there is a view that during crises domestic investors purchase safe, foreign assets while foreign investors purchase domestic assets at fire-sale prices. On the other hand, there is another view that during periods of financial distress domestic investors sell their foreign assets to repurchase domestic assets as this reduces the likelihood of default (Broner, Martin, and Ventura, 2008). These views have opposite predictions regarding the behavior of gross international investment positions, since the former predicts an increase in gross positions during crises while the latter predicts a reduction. In this paper, we present a dynamic model of sovereign risk and portfolio dynamics that illustrates the mechanisms at play. We also present evidence on the dynamics of international portfolios for various types of financial flows, distinguishing between different types of crises, time periods, and levels of economic/financial/legal development.

Suggested Citation

  • Tatiana Didier & Sergio Schmukler & Aitor Erce & Fernando Broner, 2009. "Sovereign risk and international portfolio dynamics," 2009 Meeting Papers 1057, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:1057
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