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FOREIGN PORTFOLIO INVESTMENT INFLOWS TO THE UNITED STATES: THE IMPACT OF INVESTOR RISK AVERSION AND US STOCK MARKET PERFORMANCE

Peter V. Egly

The University of Texas - Pan American, USA.

 

David W. Johnk

The University of Texas - Pan American, USA.

 

Daniel Perez Liston

The University of Texas Pan American, USA.

 

ABSTRACT

This paper examines the relationship of net foreign portfolio investment inflows, namely corporate bonds and stocks, to two pull factors; investor risk aversion and the US stock market. Using a vector autoregressive model, we find that positive shocks to the stock market elicit an insignificant response to the net corporate bond inflow and a significant short term positive response to the net corporate stock inflow. The net corporate stock inflow does not respond to risk aversion, while bond inflows do exhibit a significant midterm response to an increase in risk aversion. Consistent with previous empirical findings, the results show that internal country-specific factors may influence foreign portfolio inflows.

Keywords: portfolio investment; investor risk aversion; vector auto regression

JEL Codes: F30, G11