The growing importance of investment funds in capital flows

Richard Schmidt and Pinar Yesin

No 421, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: In this paper, we first document the growing importance of foreign-domiciled investment funds in countries’ portfolio liabilities over time and then show empirical evidence that cross-border fund flows are coincident with asset price movements. To measure the external liabilities of countries to foreign-domiciled funds, we complement conventional balance of payments and international investment position data with granular and real-time fund flows data. We find that the external exposure of countries to investment funds has been steadily increasing both for advanced and emerging market economies. Furthermore, we find that this increased external exposure is coincident with higher exchange rate fluctuations, lower bond yields and higher stock returns. Because sustainability-themed investment funds are growing faster than conventional investment funds, we also focus on Environmental, Social and Governance (ESG) funds and construct an index of sustainable finance that can distinguish between its domestic and cross-border components. Our index reveals that ESG funds domiciled in European countries tend to invest predominantly in domestic markets, whereas ESG investment in emerging market economies to a large extent originates from foreign-domiciled investment funds.

Keywords: Investment funds; portfolio investment; fund flows; ESG funds; financial markets (search for similar items in EconPapers)
JEL-codes: F32 G15 G23 (search for similar items in EconPapers)
Date: 2022-11
New Economics Papers: this item is included in nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The growing importance of investment funds in capital flows (2022)
Working Paper: The growing importance of investment funds in capital flows (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:421

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