TY - JOUR
T1 - Geopolitical risk and U.S. foreign portfolio investment
T2 - A tale of advanced and emerging markets
AU - Choi, Sangyup
AU - Havel, Jiri
N1 - Publisher Copyright:
© 2024 Elsevier Ltd
PY - 2025/2
Y1 - 2025/2
N2 - We study how U.S. portfolio investors react to the geopolitical risk in destination countries. First, we uncover significant heterogeneity between advanced and emerging market destinations: U.S. investment in foreign bonds and equities decreases only in response to heightened geopolitical risk in emerging markets, not in advanced markets. Second, we identify poor institutional quality and, to a lesser extent, closed capital markets in emerging market economies as the primary driver behind the larger sensitivity of portfolio investment to geopolitical risk. Third, we find a contagion effect that U.S. portfolio investment declines significantly in response to the heightened geopolitical risk in nearby countries even after controlling for the risk in the destination country. This contagion effect is confined to emerging markets, further highlighting the difference between advanced and emerging markets.
AB - We study how U.S. portfolio investors react to the geopolitical risk in destination countries. First, we uncover significant heterogeneity between advanced and emerging market destinations: U.S. investment in foreign bonds and equities decreases only in response to heightened geopolitical risk in emerging markets, not in advanced markets. Second, we identify poor institutional quality and, to a lesser extent, closed capital markets in emerging market economies as the primary driver behind the larger sensitivity of portfolio investment to geopolitical risk. Third, we find a contagion effect that U.S. portfolio investment declines significantly in response to the heightened geopolitical risk in nearby countries even after controlling for the risk in the destination country. This contagion effect is confined to emerging markets, further highlighting the difference between advanced and emerging markets.
KW - Contagion
KW - Emerging markets
KW - Foreign portfolio investment
KW - Geopolitical risk
KW - Institutional quality
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U2 - 10.1016/j.jimonfin.2024.103253
DO - 10.1016/j.jimonfin.2024.103253
M3 - Article
AN - SCOPUS:85211251064
SN - 0261-5606
VL - 151
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
M1 - 103253
ER -