Abstract
By using data from nine waves of the IMF Coordinated Portfolio Investment Survey, we explore the determinants of bilateral portfolio investments and their dynamics. The main goal of our analysis is that of understanding whether a diversifi cation motive can be found, among the various determinants. We introduce a new diversifi cation variable given by the correlation between the idiosyncratic components of GDP growth and first take into account unobserved heterogeneity by means of a country pair-fi xed e ffect, panel estimation relaxing the more restrictive double fixed eff ects model due to Lane and Milesi-Ferretti (REStat 90:538-549, 2008). We find strong evidence that a diversifi cation motive is relevant to explain bilateral portfolio holdings. The same results cannot be obtained from cross section estimations as in previous literature. It also turns out that investing in stocks of less synchronised partner economies does not bring about a lot of income smoothing, as one might have expected.
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