Exorbitant Changes in Three Parts

Alexandra M. Tabova and Francis E. Warnock

No 34372, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that the positive differential on international portfolio returns, one aspect of the U.S. exorbitant privilege, has disappeared in three parts. Part One: U.S. international liabilities used to be mostly in low-return bonds while its international assets were largely in high-returning equities, thus naturally producing a positive return differential. More recently, however, U.S. equity liabilities have increased sharply, slightly reducing this compositional tailwind. Part Two: While the exorbitant privilege literature has focused on the sample arithmetic mean, the geometric mean is also required to produce an unbiased estimate of expected returns. Incorporating geometric means greatly reduces the returns differential. Part Three is a combined switch a) from aggregate to comprehensive security-level data to more accurately calculate returns and b) from expected to realized returns that take into account the timing and magnitude of portfolio flows. The combined effect of these changes is that over the past two decades the U.S. portfolio returns differential was not 228 bps but zero, and it is expected to be roughly zero over the next decade.

JEL-codes: F30 G11 G12 (search for similar items in EconPapers)
Date: 2025-10
Note: IFM
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