What drives the US portfolio investments to the European Union countries?

Abstract

This study identifies the major determinants of the US portfolio equity and debt investments in the European Union (EU) countries during 1997-2012. It examines whether the EU financial development has promoted the US portfolio investments. The results indicate that the higher stock market development accelerated by the European Monetary Union formation has boosted the portfolio equity flows. The stock market size has the larger positive effect on the equity flows than the stock market liquidity. The results also suggest that the higher bank development has decreased the portfolio investments. More bank credit flows have diminished the equity and debt flows. Finally, the results confirm that the financial crisis has not weakened the stock market development effect on the portfolio investments. The stock market liquidity has continued to be the main investment driver during the crisis period 2008-2012. The EU countries are still considered as the safe destinations for the US portfolio investments given their better macroeconomic fundamentals and institutions to better insulate themselves from crisis.