Bilateral Capital Flows: Transaction Patterns and Gravity

Rogelio Mercado

Economic Papers from Trinity College Dublin, Economics Department

Abstract: Holdings of cross-border bilateral assets are highly responsive to information frictions, market size, transaction costs, and trade ties. But empirical support using transactions data are constrained by the lack of comprehensive bilateral capital flows data covering large sample of economies for several years across investment and investor types. One expects that as information frictions weaken, transaction costs decline, and trade links strengthen, financial transactions between two economies will rise. This paper tests this hypothesis. Using bilateral Financial Accounts data from the Regional Balance of Payments Statistics of 10 advanced economies yielding an unbalanced panel with 182 country pairs for 2000-2016, the results provide strong evidence on the significance of information frictions, bilateral trade, transaction costs, and market size on bilateral capital flows. However, the findings show varying sensitivities of domestic and foreign investors to information asymmetries and trade ties. Moreover, investors appear to be more responsive to domestic transaction costs and foreign market size effects, than the converse. This study demonstrates an application of using bilateral capital flows data in revealing the patterns of international financial market segmentation still prevailing in cross-border financial transactions.

Keywords: bilateral capital flows; gravity; asset trade; information frictions (search for similar items in EconPapers)
JEL-codes: F21 F36 G11 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2018-02, Revised 2018-02
New Economics Papers: this item is included in nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://www.tcd.ie/Economics/TEP/2018/TEP0218.pdf

Related works:
Journal Article: Bilateral capital flows: Transaction patterns and gravity (2023)
Working Paper: Bilateral Capital Flows: Transaction Patterns and Gravity (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduee:tep0218

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