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NATIONAL BUREAU OF ECONOMIC RESEARCH
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Investor Experiences and International Capital Flows

Ulrike Malmendier, Demian Pouzo, Victoria Vanasco

Chapter in NBER book NBER International Seminar on Macroeconomics 2019 (2020), Kristin Forbes and Pierre-Olivier Gourinchas, organizers
Conference held June 27–28, 2019
Published in May 2020 by Elsevier, Journal of International Economics, volume 124
in NBER Book Series NBER International Seminar on Macroeconomics

We propose a novel explanation for classic international macro puzzles regarding capital flows and portfolio investment, which builds on modern macro-finance models of experience-based belief formation. Individual experiences of past macroeconomic outcomes 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.

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Document Object Identifier (DOI): 10.1016/j.jinteco.2020.103302

 
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