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Investor Experiences and International Capital Flows

Ulrike Malmendier, Demien Pouzo and Victoria Vanasco

No 1163, Working Papers from Barcelona Graduate School of Economics

Abstract: We propose a novel explanation for classic international macro puzzles regarding capital flows and portfolio investment, which builds on modern macro-finance models ofexperience-based belief formation. Individual experiences of past macroeconomic out-comes have been shown to exert a long-lasting influence on beliefs about future realizations, and to explain domestic stock-market investment. We argue that experience effects can explain the tendency of investors to hold an over proportional fraction of their equity wealth in domestic stocks (home bias), to invest in domestic equity markets in periods of domestic crises (retrenchment), and to withdraw capital from foreign equity markets in periods of foreign crises (fickleness). Experience-based learning generates additional implications regarding the strength of these puzzles in times of higher or lower economic activity and depending on the demographic composition of market participants. We test and confirm these predictions in the data.

Keywords: experience effects; learning; asset prices; portfolio choice; Demographics (search for similar items in EconPapers)
JEL-codes: G11 G12 G40 G41 E7 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ifn
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