Net Outflows Research Articles

Growth and Capital Flows with Risky Entrepreneurship

This paper shows that the behavior of entrepreneurs facing incomplete financial markets and risky investment can explain why growth accelerations in developing countries tend to be associated with current account improvements. The uninsurable risk of losing invested capital forces entrepreneurs to rely on self-financing, so that when business opportunities open up entrepreneurs increase saving to finance the investment that produces growth. The key insight is that saving has to rise more than investment to allow also for the accumulation of precautionary assets. Plausibly calibrated simulations show that this net saving increase can sustain large and persistent net capital outflows.

International Capital Flows and Development: Financial Openness Matters

Does capital flow from rich to poor countries? We revisit the Lucas paradox and explore the role of capital account restrictions in shaping capital flows at various stages of economic development. We find that, when accounting for the degree of capital account openness, the prediction of the neoclassical theory is confirmed: less developed countries tend to experience net capital inflows and more developed countries tend to experience net capital outflows, conditional on various countries’ characteristics. The secondary datasets consist of respectively a series of repeated cross-sectional living conditions monitoring surveys (LCMSs). The LCMSs were collected in 1998 (baseline) and 2004 (follow-up), that is both prior, during and after the project implementation. Our aim is to assess the ability of the parametric and semi-parametric models as well as using a time- series of cross-sections to provide an adequate description of the logarithm of per adult equivalent consumption of rural household conditional on few covariates, including an infrastructure treatment dummy variable. Although, the mean cotton sales share of household income has more than doubled despite the fact that the mean distance to the input market remained unchanged from 1998 to 2004, the parametric and semi-parametric estimation results are only small and statistically insignificant in terms of gains to mean consumption emerged in the longer-term. The main results are robust to corrections for various sources of selection bias.

International Capital Flows and Development: Financial Openness Matters

Does capital flow from rich to poor countries? We revisit the Lucas paradox and explore the role of capital account restrictions in shaping capital flows at various stages of economic development. We find that, when accounting for the degree of capital account openness, the prediction of the neoclassical theory is confirmed: less developed countries tend to experience net capital inflows and more developed countries tend to experience net capital outflows, conditional of various countries’ characteristics. The findings are driven by foreign direct investment, portfolio equity investment, and to some extent by loans to the private sector.

Transverse structure of subtidal flow in a weakly stratified subtropical tidal inlet

The transverse structure of exchange flows and lateral flows as well as their relationship to the subtidal variability are investigated in a subtropical inlet, Ponce de Leon Inlet, Florida. Two surveys were executed during different phases of the tidal month to determine the spatial structure of subtidal exchange flows. Data from fixed moorings were used to depict the temporal variability of the spatial structure established in the surveys. The data suggested a tidally rectified pattern of net outflow in the channel and inflow over shoals with a negligible influence of streamwise baroclinic pressure gradients on the dynamics and slight modifications due to the wind. Onshore winds strengthened net inflows but weakened net outflows, rarely reversing them, while offshore winds increased net outflows and weakened net inflows. Curvature effects were found to be important in modifying secondary circulations. Slight modifications to the secondary flows were also caused by stream-normal baroclinicity during one survey. Most important, the intensity of the exchange flows was modulated by tides, with the largest exchange flows developing in response to the strongest tidal rectification of spring tides.

Trade and Capital Flows: A Financial Frictions Perspective

The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes, in the sense that trade integration reduces the incentives for capital to flow to capital-scarce countries. In this paper we show that in a world with heterogeneous financial development, the classic conclusion does not hold. In particular, in less financially developed economies (South), trade and capital mobility are complements. Within a dynamic framework, the complementarity carries over to (financial) capital flows. This interaction implies that deepening trade integration in South raises net capital inflows (or reduces net capital outflows). It also implies that, at the global level, protectionism may backfire if the goal is to rebalance capital flows, when these are already heading from South to North. Our perspective also has implications for the effects of trade integration on factor prices. In contrast to the Heckscher-Ohlin model, trade liberalization always decreases the wage-rental in South: an anti-Stolper-Samuelson result.

Growth and Capital Flows with Risky Entrepreneurship

This paper shows that the behavior of entrepreneurs facing incomplete financial markets and risky investment can explain why growth accelerations in developing countries tend to be associated with current account improvements. The uninsurable risk of losing invested capital forces entrepreneurs to rely on self-financing, so that when business opportunities open up entrepreneurs increase saving to finance the investment that produces growth. The key insight is that saving has to rise more than investment to allow also for the accumulation of precautionary assets. Plausibly calibrated simulations show that this net saving increase can sustain large and persistent net capital outflows.

Industry Hiring Patterns of Older Workers

The decision to remain in the workforce or fully retire is typically made between the ages of 55 and 64 and is predicated on many factors, including the availability of suitable jobs. The authors explored the extent to which members of this age group are being hired by different industries and developed a model isolating what types of factors best determine relative hiring rates: those specific to an industry, a labor market, the older worker age group, or some combination thereof. The authors estimate a low rate of new hiring for older workers aged 55 to 64 years, with low turnover and net outflows but substantial variability among industries. The findings additionally suggest that current national industry job growth and pay differentials among older new hires, existing older workers, and other new hires have the greatest bearing on how much these net flows vary by industry within states. Implications for older workers, their prospective employers, and policy makers are discussed.

How Persistent are International Capital Flows?

This paper documents the dynamic properties of the current account, trade balance and international capital flows. For this purpose, two approaches are taken: probit and a nonparametric estimation. The probabilistic approach shows that, in general, deficits and net inflows tend to be more persistent than surpluses and net outflows. This result is robust to either specification of pooled and country-specific probits. The results of non-parametric estimation are in line with the results obtained from the probit.

The impact of sovereign wealth funds on global financial markets

If sovereign wealth funds act similarly to private investors and thus allocate foreign assets according to market capitalisation rather than liquidity considerations, official portfolios reduce their “bias” towards the major reserve currencies — the US dollar and the euro. As a result, more capital flows “downhill“ from rich to less wealthy economies. In this scenario, the euro area and the United States would be subject to net capital outflows while Japan and the emerging markets would attract net capital inflows. The potential implications of a rebalancing of international capital flows for stock prices, interest rates and exchange rates remain uncertain, however.

On the determinants of net international portfolio flows: A global perspective

In a panel covering a large number of countries from 1970 to 2003, we show that population ageing, institutions, money and deviations from the Uncovered Interest Parity (UIP) influence developments in net capital flows. Population ageing is associated with net equity inflows, net outflows in debt instruments and current account deficits. Better institutions favor net capital inflows. Higher money to GDP ratio – associated with lower interest rates – enhances international investments in domestic stocks to the detriment of the less attractive domestic bonds. As for the deviations from the UIP, a rise in the short-term domestic interest rate above its trend brings about an equilibrating portfolio shift away from domestic debt instruments.

Measuring PAYG Pension Liabilities of Listed Chinese SOEs to Incorporate Future Cash Flows

Using simulated data and the expected cash flow (ECF) technique, Level 3 fair value estimates can be applied to estimate the Generational Imbalance (GI) measure arising from the unreported underfunded position of pay-as-you-go (PAYG) pensions incurred by a sample of Hong Kong listed Chinese SOEs. The GI measure helps examine the financial implications of including future cash flow estimates in current financial position for PAYG pensions as well as their enterprise and government sponsors. Positive GI figures imply net cash outflows over the period of funding current pension plan members and project net pension liabilities as an alternative measure of funded status at the end of the period. Pension underfunding imposes a funding burden on future pension plan members, a contingent claim against income of the SOEs or requires supplementary subsidies of the governments. The magnitude of GI is sensitive to the ECF estimates, the discount rate adopted in present value calculations, and the retirement age of pension plan members.

Trade and Capital Flows: A Financial Frictions Perspective

The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes, in the sense that trade integration reduces the incentives for capital to flow to capital-scarce countries. In this paper we show that in a world with heterogeneous financial development, the classic conclusion does not hold. In particular, in less financially developed economies (South), trade and capital mobility are complements. Within a dynamic framework, the complementarity carries over to (financial) capital flows. This interaction implies that deepening trade integration in South raises net capital inflows (or reduces net capital outflows). It also implies that, at the global level, protectionism may backfire if the goal is to rebalance capital flows, when these are already heading from South to North. Our perspective also has implications for the effects of trade integration on factor prices. In contrast to the Heckscher-Ohlin model, trade liberalization always decreases the wage-rental in South: an anti-Stolper-Samuelson result.

Understanding the Non-Linear Relation between Mutual Fund Performance and Flows

We examine gross flows to mutual funds and find that existing investors punish poorly performing funds by increasing outflows. We also find that existing and potential investors punish poorly performing funds by reducing inflows. Finally, we uncover that current investors respond to poor performance with the same intensity as they do to good performance. Overall, we conclude that new investors must drive the observed non-linearity between mutual fund performance and net flows. This conclusion runs contrary to the extant literature which generally ascribes the absence of net outflows in the face of poor performance to inactivity by existing fund investors (i.e., they do not exit).

Who Moves Stock Prices? Monthly Evidence

Existing evidence using US data show a simultaneous covariability between a stock's price and quarterly flows into and out of the stock by institutional investors. In this paper we use data on monthly changes in holdings by all investor groups at the Oslo Stock Exchange to show that such quarterly effects are concentrated within a month. We find a positive relation between monthly net flows into a stock by institutions and foreigners and the stock's return. We find no evidence of any effects the next month, providing evidence against the hypothesis that quarterly results are due to within-quarter feedback. Such feedback effects must be of less than one month duration. We show that offsetting net inflows by mutual funds and foreigners are net outflows by individual and nonfinancial investors. The interesting question is which of these groups are active in pushing prices. While we can not empirically distinguish which of the various investor groups is reacting, we argue that the most reasonable story is that institutions and foreign investors are the active parties, since the prices move in the direction of these groups' trades. The lack of next-month feedback (price reversals) is consistent with prices moving toward fundamentals.

International Capital Flows Within the European Monetary Union: Increasing Economic Divergence Between the Centre and the Periphery

This paper aims at investigating some neglected consequences of free capital mobility in the Euro area. The approach we use in this work is based on the book-keeping nature of money, which shows that capital – in the form of bank deposits – is mobile within a currency area but actually immobile between different monetary spaces. Within the Euro area both short- and long-term investments are directed into those economies where the return on investment is highest, a magnitude that is positively correlated with the rate of real growth. If so, then economic divergence might increase between member countries of the European Monetary Union (EMU), giving rise thereby to a higher rate of unemployment in those member countries that suffer from net capital outflows, to the benefit of some other countries in the same area.

Mutual Fund Mergers: A Long-Term Analysis

The mutual fund merger is neither a rare nore recent phenomenon. During the period 1962-1999, one out of ever six open-end equity funds were merged out of business. Interestingly, the distribution of equity fund mergers clusters in the 1970s when volatile stock markets have a great adverse impact on the industry and in the 1990s when the industry grows rapidly with bullish stock markets. This paper investigates the determinants and consequences of mutual fund mergers. I hypothesize that mutual fund mergers play two roles in the fund dynamics - eliminating inefficient funds and supporting the growth of well-performing funds. Using a sample of 604 equity fund mergers from CRSP, I find that the acquired funds are small, underperform persistently, and experience net outflows. Logit regression results further show that funds with these attributes are more likely to be taken over. Acquiring funds' performance is above average in the pre-merger period, but deteriorates after mergers. I find some evidence that funds merge to exploit the economies of scale in fund management. Compared to acquired funds, liquidated funds are tiny and even younger. In conclusion, mutual fund mergers provide an exit mechanism for funds of small size or with inferior growth opportunity.

Do demand curves for stocks slope down?: Evidence from aggregate data

We examine whether the aggregate demand curve for stocks is downward sloping. As a proxy for aggregate demand, we use net outflows (dividends plus repurchases less net issues) from the stock market scaled by the previous year's market capitalization. To disentangle the information and price pressure effects from the demand curve effects, we use an information-free demographic variable as an instrument and look at the relation between annual changes in aggregate demand and excess market return. We find that information-free changes in the annual aggregate demand for stocks do not lead to changes in the annual excess market return. This finding supports long-term horizontal demand curves for stocks.

On the Determinants of External Imbalances and Net International Portfolio Flows: A Global Perspective

In a panel covering a large number of countries from 1970 to 2003, we show that net portfolio flows play an important role in correcting external imbalances, since they are driven by common determinants represented by countries’ demographic profiles, the quality of institutions, monetary aggregates and initial net financial asset positions. Population ageing causes current account deficits, net equity inflows and net outflows in debt instruments. A higher money to GDP ratio – associated with lower interest rates – favours international investments in domestic stocks to the detriment of the less attractive domestic bonds. Additionally, current account balances are driven negatively by real GDP growth, losses in competitiveness and increases in the quality of the institutions; net equity flows are driven positively by the quality of the institutions and negatively by per capita income; while net flows in debt instruments are driven by long-term interest rate differentials and deviations from the UIP. JEL Classification: F21, F32, F41, O16

Investors Do Respond to Poor Mutual Fund Performance: Evidence from Inflows and Outflows

The non-linear relation between mutual fund performance and subsequent net flows is well documented in the mutual fund literature. The extant literature generally ascribes the absence of net outflows in the face of poor performance to inactivity by existing fund investors (i.e., they do not to exit). We examine monthly gross flows and find that existing investors do, in fact, respond to poor mutual fund performance. Specifically, existing investors punish poorly performing funds by increasing outflows. We also find that existing and potential investors punish poorly performing funds by reducing inflows to those funds. Finally, we document that current investors respond to poor performance with the same intensity as they do to good performance.

Boundary Intensification of Vertical Velocity in a β-Plane Basin

Abstract The buoyancy-driven circulation of simple two-layer models on the β plane is studied in order to examine the role of beta in determining the magnitude and structure of the vertical motions forced in response to surface heating and cooling. Both analytical and numerical approaches are used to describe the change in circulation pattern and strength as a consequence of the planetary vorticity gradient. The physics is quasigeostrophic at lowest order but is sensitive to small nonquasigeostrophic mass fluxes across the boundary of the basin. The height of the interface between the two layers serves as an analog of temperature, and the vertical velocity at the interface consists of a cross-isopycnal velocity, modeled in terms of a relaxation to a prescribed interface height, as well as an adiabatic representation of eddy thickness fluxes parameterized as lateral diffusion of interface displacement. In the numerical model the lateral eddy diffusion of heat is explicitly represented by a resolved eddy field. In the plausibly more realistic case, when the lateral diffusion of buoyancy dominates the diffusion of momentum, the major vertical velocities occur at the boundary of the basin as in earlier f-plane studies. The effect of the planetary vorticity gradient is to intensify the sinking at the western wall and to enhance the magnitude of that sinking with respect to the f-plane models. The vertical mass flux in the Sverdrup interior exactly balances the vertical flux in the region of the strong horizontal transport of the western boundary current, leaving the net flux to occur in a very narrow region near the western boundary tucked well within the western boundary current. On the other hand, if the lateral diffusion of heat is arbitrarily and unrealistically eliminated, the vertical mass flux is forced to occur in the interior. The circulation pattern is extremely sensitive to small net inflows or outflows across the basin perimeter. The cross-basin flux determines the interface height on the basin’s eastern boundary and affects the circulation pattern across the entire basin.