Bilateral portfolio dynamics during the global financial crisis

There has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis: for a given destination, investors from different countries adjusted their holdings to different degrees. We show that the size of the initial bilateral holding, geographical distance, common language, the level of trade and common institutional linkages help to explain the pattern of adjustment. These bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries.

▸ Portfolio adjustment across country pairs can be related to bilateral characteristics. ▸ Gravity and regional-bloc variables relate to the nature of the adjustment process. ▸ We conjecture that the information is especially important during turbulent periods. ▸ It is striking that the mean-reversion effect is consistently significant.