A Gravity Model of Geopolitics and Financial Fragmentation

Mario Catalan, Salih Fendoglu and Tomohiro Tsuruga

No 2024/196, IMF Working Papers from International Monetary Fund

Abstract: Do geopolitical tensions between countries influence the cross-border asset allocation of investment funds? Our answer is yes. We estimate gravity models and find that investment funds allocate smaller shares of their portfolios to recipient countries that are geopolitically more distant to their country of origin—with geopolitical distance measured by dissimilarity in countries’ voting behavior in the United Nations General Assembly. We also find an investment diversion effect: a recipient country attracts additional investments when its source countries get geopolitically more distant to third-party countries. These results are robust to instrumenting geopolitical distance and using alternative distance measures.

Keywords: Globalization; geopolitics; geoeconomics; fragmentation; portfolioflows; cross-border; asset allocation; investment funds; gravitymodel; international finance.; investment diversion effect; geopolitical distance; recipient country; recipient-country time; country pair; Mutual funds; Estimation techniques; Plurilateral trade; Bonds; Global; Middle East (search for similar items in EconPapers)
Pages: 37
Date: 2024-09-13
New Economics Papers: this item is included in nep-fdg, nep-int, nep-inv, nep-ipr and nep-pol
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