Investment and Saving in the European Union: Another Look at Feldstein–Horioka

Anastassios A. Drakos, Georgios Kouretas, Stavros Stavroyiannis and Leonidas Zarangas

Chapter 6 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 199-234 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this chapter, we employ data from a panel consisting of 28 European Union (EU) member countries over the period 1990–2020 to examine the validity of the famous Feldstein– Horioka (F–H) puzzle. Despite many criticisms, the F–H saving–investment correlation hypothesis is still used in the literature to infer the degree of capital mobility among countries. To this end, we apply a battery of panel unit root and cointegration tests. The finding of the presence of cointegration of the savings and investment ratios and the observed magnitude of the estimated average saving-retention coefficient for the panel reveal that for this panel of EU member countries, the F–H puzzle is not valid and the long-run international solvency condition is maintained in most of these countries. The observed low saving-retention coefficients for these countries imply a moderate degree of capital mobility and the absence of the F–H puzzle. This finding of the prevalence of a moderate degree of capital mobility is consistent with the macroeconomic experience of these countries during the period under investigation.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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