IS CORRELATION PUZZLE REALLY PUZZLING? REASSESSING MOTIVES OF FOREIGN ASSET HOLDINGS BY US INVESTORS

Kenta Inoue

International Journal of Finance & Economics, 2014, vol. 19, issue 2, 160-172

Abstract: This paper addresses a correlation puzzle in the financial gravity literature by taking into account a return‐chasing motive previously under‐researched as determinants of cross‐border asset holdings. I estimate a financial gravity equation to explain US investors' behaviour and confirm that even with the return chasing motive, the correlation puzzle remains unsolved. Furthermore, the data give a limited support for the return‐chasing motive. I find that USA's foreign asset holdings cannot be well explained by the correlation structure and excess returns. Copyright © 2013 John Wiley & Sons, Ltd.

Date: 2014
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