NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Decomposing the U.S. External Returns Differential

Stephanie E. Curcuru, Tomas Dvorak, Francis E. Warnock

NBER Working Paper No. 15077
Issued in June 2009
NBER Program(s):   IFM

We decompose the returns differential between U.S. portfolio claims and liabilities into the composition, return, and timing effects. Our most striking and robust finding is that foreigners exhibit poor timing when reallocating between bonds and equities within their U.S. portfolios. The poor timing of foreign investors--caused primarily by deliberate trading, not a lack of portfolio rebalancing--contributes positively to the U.S. external returns differential. We find no evidence that the poor timing is driven by mechanical reserve accumulation by emerging market countries; rather, it is driven almost entirely by the poor timing of rich, developed (mainly European) countries. Finally, while poor foreign timing appears to be persistent across subsamples, other terms in our decomposition (the composition and return effects and U.S. timing abroad), as well as the overall differential, are sometimes negative, sometimes positive, and usually indistinguishable from zero.

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Document Object Identifier (DOI): 10.3386/w15077

Published: Curcuru, S., T. Dvorak, and F. Warnock, 2010. "Decomposing the U.S. External Returns Differential." Journal of International Economics 80: 22-32.

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