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RFS Advance Access originally published online on January 30, 2008
Review of Financial Studies 2008 21(2):937-971; doi:10.1093/rfs/hhm091
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© The Author 2008. Published by Oxford University Press on behalf of the Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Institutional Portfolio Flows and International Investments

Kenneth A. Froot
Harvard Business School and NBER

Tarun Ramadorai
University of Oxford Saïd Business School, Oxford-Man Institute for Quantitative Finance, London Business School, and CEPR

Address correspondence to Kenneth A. Froot, Harvard Business School and NBER, Boston, MA 02163; telephone: 617-495-6677; e-mail: kfroot{at}hbs.edu.

JEL Classification: G15, F21, G11


  Abstract

Using a new technique, and weekly data for 25 countries from 1994 to 1998, we analyze the relationship between institutional cross-border portfolio flows, and domestic and foreign equity returns. In emerging markets, institutional flows forecast statistically indistinguishable movements in country closed-end fund NAV returns and price returns. In contrast, closed-end fund flows forecast price returns, but not NAV returns. Furthermore, institutional flows display trend-following (trend-reversing) behavior in response to symmetric (asymmetric) movements in NAV and price returns. The results suggest that institutional cross-border flows are linked to fundamentals, while closed-end fund flows are a source of price pressure in the short run.

We are grateful to State Street Bank for their help in obtaining data and Harvard Business School for financial support. We have benefited from the comments of participants in the Finance Workshop at Harvard University, the NBER Conference on the Management of Currency Crises, the European Financial Management Association meetings, and an anonymous referee. We thank John Campbell, Pablo Casas-Arce, Xavier Debrun, Alexander Guembel, Joel Hasbrouck, Pete Kyle, André Perold, Joshua Pollet, Jeremy Stein, René Stulz, Linda Tesar, and Joshua White for useful conversations and helpful comments. The views expressed here are ours, and we alone bear responsibility for any mistakes and inaccuracies.


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