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This paper presents a simple model of net foreign investment. It is shown that an increase in the expected return of investments in the foreign technology decreases net foreign investment in the domestic country, whereas an increase in the variance of the return of investments in the foreign technology increases net foreign investment in the domestic country. An increase in foreign wealth accompanied by an equivalent decrease in domestic wealth is shown to increase net foreign investment in the domestic country. Finally, it is shown that an increase in the risk tolerance coefficient of the domestic investor has, to a first approximation, no effect on net foreign investment in the domestic country. A closed-form solution is given for the case in which all investors have a logarithmic utility function and is used to derive the dynamics of net foreign investment. One direction in which the present model could be extended consists in taking into account the fact that it is harder for domestic investors to enforce property rights abroad than at home. If property rights cannot be enforced abroad by domestic investors and at home by foreign investors, net foreign investment is always equal to zero, even though gross foreign investment differs from zero. Whereas the differential cost of enforcing property rights at home and abroad for domestic investors creates incentives for foreign investors to take actions which reduce the value of the net investment abroad by domestic investors, domestic investors can impose substantial penalties on foreign investors if they engage in confiscatory actions. The suggested extension of the analysis involves the development of a concept of equilibrium that accounts for the dependence of the actions of domestic investors on what they believe foreign investors will do. [ABSTRACT FROM AUTHOR]

This paper examines the consequences of putting the word "international" in front of Ross's Arbitrage Pricing Theory, or, in shortened form, of putting an "I" in front of "APT". Professor Solnik has played an important role in putting that same letter in front of another important acronym in asset pricing theory. The outcome of that effort was, of course, the IAPM, and it appears that it is largely dissatisfaction with the testability of that theory which motivates the work presented here. Professor Solnik discusses his work primarily in terms of international pricing and his results are, of course, interesting for that application. He also notes other potential applications, e.g. asset pricing with relative price uncertainty. First we want to discuss the theoretical considerations involved in extending the APT to an international setting and then consider what is gained on the empirical front by making this extension. [ABSTRACT FROM AUTHOR]

This paper seeks to extend the theory of valuation and the cost of capital to the case of a multinational corporation (MNC) operating in two countries. It represents an initial attempt to address issues regarding the conditions under which MNCs can plan globally for a world-wide enterprise optimum especially when controls restrict free international capital movements. The paper raises and explores several important specific questions. Are the MNC's valuation maximand and cost of capital functions of the nationality of its investment projects and financing sources? Do they depend on the structure of the MNC itself? Can mutually consistent valuation objectives and investment planning criteria be devised for the parent and its subsidiaries when ownership is international? To date, such matters have fallen outside the scope of the theory of finance. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to present a case study of this type--the holdings of short-term foreign assets by the German banks. The ratio of short-term foreign asset to the total asset is explained by various yields on alternative assets. In addition, the effect of short-term constraint variable on the adjustment of actual stock to the desired stock of asset holdings is incorporated in the analysis. The variables included perform rather well in explaining the monthly fluctuations of the asset ratios. This paper presents a case study of the international movements of short-term banking funds with the application of the asset portfolio approach which has been so fruitful in the investigation of demand for domestic financial assets. The study demonstrates that when a balance-sheet framework can be clearly defined, the portfolio balance analysis provides a very effective approach to the study of capital flows between countries. The experience of the holding of short-term foreign assets of the German banks is investigated. With the holding of foreign assets treated as one of many assets (and liabilities) in a well-defined balance sheet for the German banks, the portfolio approach is applied with some success. The importance of such variables as total asset holdings (LA), yields on alternative assets (r[sub 1]), and flows of liquid funds (CBM) in affecting the asset holdings is borne out by the results obtained. Some 70 per cent of the fluctuations of the ratios of foreign assets to total liquid assets are explained by the variables r[sub L], r[sub LA[sub d]] - r[sub FA], and CBM/LA[sub t-1]. The estimated coefficients are all significant. The incorporation of variables LA and CBM also helps improve the estimation of interest rate variables, giving us a very satisfactory result for the estimated coefficients for interest rates. The scope of the paper is obviously limited. Those problems such as the need for non-linear equation, the importance of adopting simul... [ABSTRACT FROM AUTHOR]

The article discusses international capital movements during the postwar period in a context of broad trends in world payments. Data on balance of payments statistics was collected by the International Monetary Fund in addition to the data available by official grants and capital movements for this research. However, there is a lack of data on private capital and short term capital as it is not consistent from country to country and so contributes to some errors in research. Also, the quantitative statements provided are merely indications of orders of magnitude rather than specific estimates due to the lack of data.

This paper documents that investors are more likely to hold, buy, and sell the stocks of Finnish firms that are located close to the investor, that communicate in the investor's native tongue, and that have chief executives of the same cultural background. The influence of distance, language, and culture is less prominent among the most investment-savvy institutions than among both households and less savvy institutions. Regression analysis indicates that the marginal effect of distance is less for firms that are more nationally known, for distances that exceed 100 kilometers, and for investors with more diversified portfolios. [ABSTRACT FROM AUTHOR]

This comment addresses an important issue in capital market theory in general and in its application to the international capital market in particular. However, we feel that many of the questions raised by Adler regarding our earlier paper result from trying to make more of our results than we intended. In our paper we explicitly stated that two conditions must exist in order to provide a financial motivation for direct foreign investment (DFI) over portfolio investment: (1) there must exist greater barriers or costs to portfolio capital flows than to capital flows forming part of the direct investment package; and (2) investors must recognize that MNCs provide a diversification opportunity which otherwise is not available. We provided examples of potential barriers, but did not attempt to specify them or test for their existence. What we did was to show that the risk characteristics of firms engaged in DFI was not inconsistent with a rational capital market response to these foreign activities. We feel that this was an important result given a widespread view that foreign activities were perceived as increasing the risk of U.S. firms engaged in DFI. [ABSTRACT FROM AUTHOR]

This paper investigates the existence of monopoly rents associated with international operations in a market-value theoretic framework. The benefits of international operations evolve from such factors as (1) imperfections in the product and factor markets, (2) differential international taxation, and (3) imperfections in the financial markets. In this paper, these factors are subject to an equilibrium analysis in the context of recent advances in financial theory. In particular, imperfections in the financial sector arising from corporate international diversification are examined in a framework which allows (a) supply adjustments by multinational firms and (b) the interaction of barriers to international capital flows faced by both firms and investors. Taking the U.S. capital market and investors as a base, we then specify the conditions under which the foregoing imperfections get “priced out” in an equilibrium. These pricing effects cannot be detected empirically through the methodologies employed by the existing studies which examine the effects of corporate international diversification. Indeed, it was an attempt to rescue the limitations of these studies which initially motivated our paper. The existing empirical inquiries into this area rely on traditional risk-adjusted performance measures (e.g.) or international analogs of return generating processes (e.g.,). Instead, at the empirical level, we employ a “value-based” method which is in the same vein of the Thomadakis approach developed to identify the monopoly benefits of industrial market structure. We conduct the tests over sub-periods characterized by differential government controls in an attempt (a) to separate the pure financial motives for multinationality from other motives, and (b) to detect if the benefits of international operations carry through recent periods. [ABSTRACT FROM AUTHOR]

In the late sixties modern capital market theory started to be applied to the area of international investment (Grubel, (1968), Levy and Sarnat, (1970)). The original idea was to apply the Markowitz-Sharpe risk-return analysis to expost data on stock prices and exchange rates, in order to determine the optimal internationally diversified portfolios that investors of each country should hold. It has been argued that optimal portfolios should be different for investors of different countries because of exchange risk. This argument, supported by some empirical evidence, has been used to justify capital flows between countries (see, for example, Levy and Sarnat, (1975), Lee, (1969), etc.). This paper will argue that such a conclusion is inconsistent with the theoretical framework used. Moreover, the big issue is the economic definition of exchange risk. More recently equilibrium models of the international capital market have been proposed (Solnik, (1974), Grauer, Litzenberger and Stehle, (1976)). Their underlying definitions of exchange risk are different and lead to somewhat different pricing relations and optimal portfolio selections. [ABSTRACT FROM AUTHOR]

The author of any paper with policy implications welcomes discussion of his results, in the knowledge that what is not discussed is forgotten. In this spirit I welcome Dr. Stevens' paper calling for further examination of my framework for analysing the balance-of-payments effects of controls on foreign investment. As he notes, it is puzzling that the earlier literature had devoted so much attention to the hard-to-interpret payback periods instead of looking at the kinds of present-value and rate-of-return calculations initiated by my December 1971 article. Stevens goes on to suggest two revisions in the 1971 article, one dealing with estimated trade effects and one extending my framework to cover the case of rapidly growing outflows checked by permanent controls. These points are worth discussing, since other readers of the 1971 article may also have wanted more treatment of them than space permitted in 1971. Yet it turns out that Stevens' comment fails to blunt my 1971 policy conclusions, and my 1971 article's framework appears to have covered all cases correctly. [ABSTRACT FROM AUTHOR]

This paper has considered the qualitative impacts of certain controls on Euro-dollar flows on the basis of a general equilibrium port-folio model of the Euro-dollar market. Possible controls were considered in two groups--unilateral controls and multilateral or coordinated controls. With reference to unilateral controls, the analysis suggested that attempts to utilize these measures, in the highly integrated and interdependent world economy as exists today, are likely to be futile. For unless the authorities imposing the controls are prepared to control all transactions (trade and capital) the direct impact of particular controls is likely to be offset by variations in other items of the balance of payments. Examples of these offsets were cited from the German and U.S. experiences with capital controls. However, the analysis suggested that while unilateral controls will probably prove ineffective, multilateral or coordinated controls may offer a useful first step in the coordination of monetary policies of (at least) the larger industrial nations by offering a means of influencing the velocity of money created in the reserve centers of the world economy. [ABSTRACT FROM AUTHOR]

This paper concentrates its attention on the operation of the bank holding company. It views the banking company through the eyes of management concerned with achieving the objectives of the corporation. As we learned in Economics 101, profit maximization is not the least of these objectives. [ABSTRACT FROM AUTHOR]

In periods of frequent realignment of foreign exchange rates, interest focuses understandably on the causes of capital movements. The difficulty with studies of such movements usually lies in obtaining data sufficiently disaggregated so as not to force too many types of motivation into one all-encompassing specification. This was the problem M. Porter as well as W. H. Branson and R. D. Hill faced when studying capital movements of OECD countries. C. F. Ou started from a much more narrowly defined asset category but failed to distinguish between demand balances held for transactions requirements and interest earning assets. Despite the attention that capital flows have received of late, their importance for the present system of international exchange rates and the conduct of monetary policy as well as the shortcomings of the studies to date may justify another inquiry. Specifically, the present paper will review briefly the theoretical underpinnings for German banks' decisions to hold short term assets abroad. The main purpose is twofold: 1) to determine which interest rates and scale variables yield the best explanation of actual changes in the stock of such assets held by German banks; 2) to obtain an estimate of changes in the short term capital account of the German balance of payments that can be attributed to banks' portfolio adjustments in the face of interest rate changes at home and abroad. [ABSTRACT FROM AUTHOR]

This article offers commentary on the paper "The Adjustment Process and the International Role of the Dollar" by Roy Blough, which analyzes the balance of payments linkage and the need to coordinate international monetary policies. The author points out that international imbalances can take the form of internal inflation or deflation, and changes in exchange rates can be used to adjust to disequilibria in international payments. The author supports Blough's claim that if nations can agree about border tax adjustments, international agreements can be reached concerning the adjustment mechanisms now available to international leaders.

In this paper we formalize the theoretical argument by viewing indirect portfolio diversification by MNCs as a means of completing the international capital market. We employ a paradigm in the unanimity literature and formally characterize the equilibrium in which there is a rationale for MNC financial intermediation. We then perform an expanded empirical study by employing generalized least squares and maximum likelihood procedures. Since the positive relationship between excess valuation and DOI (as suggested in ES [7]) might be attributed to the so-called “small firm” or size and the P/E effects, the test methodology controls for such effects. Also, the traditional literature has relied upon foreign sales percentage as a proxy for DOI. In view of the well recognized limitations of this proxy, we employ four different measures of international involvement. Finally, the excess valuation approach might not correspond to the alternative return approach. We, therefore, include an alternative return based test. The results corroborate the earlier findings of ES [7]. The specifics of these results are summarized in the concluding section. [ABSTRACT FROM AUTHOR]

In the past, exchange rate expectations have been modelled by economists either as a mechanistic distributed lag function of past exchange rates or as some form of "rational" expectations. In this paper we take a middle ground, specifying exchange rate expectations as a function of real economic variables that are endogenous to a fully specified Kouri-Porter type model of capital flows. We estimate both the capital flow equation and an expectations function for the fixed and floating Canadian dollar and for selected short run periods. The estimated expectations function, as expected a priori, is then shown to be at least a partial explanation for the observed instabilities of the capital flow equation. [ABSTRACT FROM AUTHOR]

In the presence of barriers to portfolio capital flows, multinational firms (MNCs) have an advantage relative to single-country firms because of their ability to diversify internationally. This financial advantage--the result of financial market imperfections--compliments the advantages MNCs derive from imperfections in real goods and factor markets and represents an additional motive for multinational expansion. This paper argues that such barriers do exist and provides empirical support for the diversification motive by showing that investors appear to recognize the extent of multinational diversification of a sample of U.S. firms listed on the New York Stock Exchange. [ABSTRACT FROM AUTHOR]

The expansion of their overseas activities by banks headquartered in the United States is one of the most important developments in international finance during the last decade. For a number of years, the motivations behind this growth were obscured by the restrictions on capital outflows imposed by the U.S. Government in the mid-1960's as part of a program to improve the nation's balance of payments. However, even before the capital restrictions were terminated in January 1974, it was becoming increasingly clear to some observers that a basic transformation had occurred in the character of U.S. banking. The origins of this transformation have been examined on several occasions in the past, and those who follow the subject closely now have a good understanding of the dimensions of the changes which have occurred. On the other hand, the impact of the regulatory framework on the way in which U.S. banks conduct their foreign business is not so fully appreciated. To a considerable extent, this reflects the sparsity of efforts by the regulatory authorities themselves to assess the effects of their actions on the institutions over which they have oversight. The objective of this paper is to broaden understanding of the interplay of U.S. commercial bank expansion abroad and the regulatory posture of the Federal Reserve Board--the Federal agency with authority over the banks' foreign activities. [ABSTRACT FROM AUTHOR]

The balance of payments in an open economy plays an important role in determining changes in the stock of domestic money. International reserve inflows, for example, will increase the domestic stock of money if they are added directly to the money balances of residents, or if they are exchanged for domestic currency at the central bank. In Australia, reserve flows are an important factor, and occasionally a dominant one, in determining changes in the domestic stock of money. This observation raises the question, what are the major determinants of Australian reserve flows and what role, if any, do policy actions play in affecting reserve flows? In this paper the latter, and simpler, approach is taken. Reserve flows are related to factors determining growth in demand for money, and to policy and other domestically determined factors that contribute to growth in the stock of money. This money-market approach to the balance of payments is a slightly modified version of a model developed by H. G. Johnson (1972). [ABSTRACT FROM AUTHOR]

The article presents a commentary on the paper "Risk Aversion and Information Structure: An Experimental Study of Price Variability in the Securities Markets," by James S. Ang and Thomas Schwarz. The author notes that the double action market utilized in the paper is somewhat similar to that used on the floor of the New York Stock Exchange (NYSE). The major differences are that the experiment relates to the thinness of the market, to the much lower number of traders and to the lack of a specialist to provide supplementary stabilization of short-term price movements. The author notes that these are differences that should be noted or else the statement implying similarity to NYSE trading should be deleted.

This paper is directed toward two issues. The first involves several competing explanations for the U.S. position in international capital market relationships. One of these explanations involves the concept of international financial intermediation; the usefulness of this analogy to domestic intermediation is questioned. The second involves the implications of each of these explanations for capital market relationships for the impact of U.S. capital outflows on the U.S. payments balance. [ABSTRACT FROM AUTHOR]

The article looks at the changing structure of the U.S. money market. Major factors which have limited the amplitude of short run fluctuations in money market rates are identified and discussed, including the stability of the economic expansion and the growth of credit demands and persisting large flows of savings. The response of policy makers to the problem of short-term capital flows in a context of interdependent national money markets is examined. Broad patters of rate stability from 1957 through 1964 are discussed. The author also looks at the effect which concerns over the balance of payments has had on policy makers.

The article presents a commentary on the paper "An Investigation of Transactions Data for NYSE Stocks," by Robert A. Wood, Thomas H. McInish, and J. Keith Ord. The author notes that the analysis presents a number of significant empirical regularities about short-term movements in stock prices. He points out three significant facts of the analysis. Average returns tended to be higher in the earliest part of the day, particularly in the first 30 minutes of trading. The standard deviation of returns when plotted against trading minute had a U-shape and was not quite symmetric. Lastly there was very little evidence for autocorrelation in overall market returns.

Does country transparency affect international portfolio investment? We examine this question by constructing new measures of transparency and by making use of a unique microdata set on portfolio holdings of emerging market funds around the world. We distinguish between government and corporate transparency. There is clear evidence that funds systematically invest less in less transparent countries. Moreover, funds have a greater propensity to exit nontransparent countries during crises. [ABSTRACT FROM AUTHOR]

This paper investigates the performance and capital inflows of private equity partnerships. Average fund returns (net of fees) approximately equal the S&P 500 although substantial heterogeneity across funds exists. Returns persist strongly across subsequent funds of a partnership. Better performing partnerships are more likely to raise follow-on funds and larger funds. This relationship is concave, so top performing partnerships grow proportionally less than average performers. At the industry level, market entry and fund performance are procyclical; however, established funds are less sensitive to cycles than new entrants. Several of these results differ markedly from those for mutual funds. [ABSTRACT FROM AUTHOR]

We examine the relation between institutional holdings and payout policy in U.S. public firms. We find that payout policy affects institutional holdings. Institutions avoid firms that do not pay dividends. However, among dividend-paying firms they prefer firms that pay fewer dividends. Our evidence indicates that institutions prefer firms that repurchase shares, and regular repurchasers over nonregular repurchasers. Higher institutional holdings or a concentration of holdings do not cause firms to increase their dividends, their repurchases, or their total payout. Our results do not support models that predict that high dividends attract institutional clientele, or models that predict that institutions cause firms to increase payout. [ABSTRACT FROM AUTHOR]

We decompose currency returns into (permanent) intrinsic-value shocks and (transitory) expected-return shocks. We explore interactions between these shocks, currency returns, and institutional-investor currency flows. Intrinsic-value shocks are: dwarfed by expected-return shocks (yet currency returns overreact to them); unrelated to flows (although expected-return shocks correlate with flows); and related positively to forecasted cumulated-interest differentials. These results suggest flows are related to short-term currency returns, while fundamentals better explain long-term returns and values. They also rationalize the long-observed poor performance of exchange-rate models: by ignoring the distinction between permanent and transitory exchange-rate changes, prior tests obscure the connection between currencies and fundamentals. [ABSTRACT FROM AUTHOR]

Investigates the impact of capital flow restrictions on the pricing securities, on the optimal portfolio composition for investors of different nationalities, and on their welfare. Equilibrium price of a security under capital flow control; Removal of investment barriers; Introduction of different types of index funds in the world market. [ABSTRACT FROM AUTHOR]

The article presents a response to the article "The Distribution of Foreign Exchange Prices: Trading Day Effects and Risk Measurement," by J. W. McFarland, R. R. Pettit, and S. K. Sung. The author comments on the distribution of foreign exchange price changes. The author's objective is to re-estimate the parameters of the distribution of changes in foreign exchange rates and to test whether "the day-of-the-week" effect found by McFarland, Petit, and Sung is due to biased location estimates caused by the assumption of a symmetric distribution. It is shown that the weekday effect is reduced substantially when the assumption of the symmetric stable distribution is relaxed.

The article presents a response to comments from Jacky C. So to the authors' article "The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement." According to the author, the comment provides an interesting extension to their work on foreign exchange markets and yields additional insights into the distributional properties of foreign exchange price changes. In estimating the skewness parameter in addition to the estimates for the characteristic exponent, scale, and location, the author finds that, in some cases, foreign exchange price changes are better represented by asymmetric stable distributions than by symmetric stable distributions. The dynamic structure of foreign exchange rate price changes and evidence of the unstable relationship between forward and spot exchange rates is also discussed. .

The article focuses on policies that can hamper international capital flows such transaction costs, information costs, and legal restrictions. A model is presented which provides a closed-form solution to the equilibrium asset-pricing problem. The effects of domestic securities dually listed on both domestic and foreign capital markets are discussed. A model is presented that characterizes the initial stages of capital market integration, in which a country with scarce capital or an underdeveloped capital market allows a number of domestic securities to be listed on a foreign capital market.while forbidding its citizens to invest in foreign securities.

By demonstrating the superiority of the present-value to the recoupment-period criterion, Peter Lindert [2] has made a major contribution to the analysis of foreign investment controls. In fact, after reading Lindert's analysis, one wonders how the recoupment-period criterion got a foothold in the first place' the assessment of the net impact of a control program is clearly dependent on a comparison of capital inflows and outflows occurring at different points in time; and the accepted and traditional way to make such intertemporal comparisons is by a present value calculation. [ABSTRACT FROM AUTHOR]

The theoretical analysis set forth in Section I shows that while the capital controls programs initially improve the balance of payments, this initial effect can be reversed after a time. The dynamic simulations over the period 1965:2- 1970:4 presented in Section II suggest the estimate of the control's effect in the initial year is an improvement of approximately $4.5 billion in the liquidity balance. Also, the effects are estimated to diminish gradually and continuously to an annual rate of some $2.8 billion after 5 years. [ABSTRACT FROM AUTHOR]

This paper reports the preliminary results of a project aimed at developing an empirical model explaining capital flows among the major OECD countries. The work is based on the portfolio-equilibrium, stock-adjustment view of capital flows. Here we discuss the estimation of equations explaining the net capital flows--the capital account balance--for six countries: the U.K., Canada, Japan, France, Western Germany, and Italy. Even with these highly aggregated and imperfect data, stable relationships between net flows and various interest rates can be estimated. [ABSTRACT FROM AUTHOR]

This article comments on the reports "The Balance of Payments and Domestic Monetary Policy" by James Duesenberry and "Monetary Policy and International Financial Objectives," by Leslie C. Peacock. The author comments on Duesenberry's view of freedom of international capital movements in the form of financial assets, and on Duesenberry's implication that the U.S. should restrict capital exports if it cannot offset them through official financing. The author disagrees with Duesenberry's statements against the free movement of financial assets.

The article focuses on international banking, the measurement of international liquidity, and theory related to the adequacy or supply of international means of payment. The issues of countries acting as international bankers and the adequacy of their reserves in relation to their commercial or foreign exchange policies are discussed. The construction of a model of reserve drain, comparison of holdings-to-imports ratios, current-account transactions, and the effect of pooling arrangements on a country's international currency reserves are considered in the discussion. Measurement methods for short-term changes in reserves--such as an index-number approach--and types of reserve assets are mentioned.

This article presents a discussion of a paper that examined international capital flows. The areas of the paper that the author examines are; the utilization of the theory of portfolio adjustment and the implications this has for international capital flows, the equations used to measure these flows and the statistical results that were generated. The author suggests that the information that was produced in the paper is quite valuable; however, he believes that the policy suggestions that are offered are not as useful.

The article presents commentary and criticism on the financial reports "U.S. Direct Investment in Canada: Consequences For the U.S. Economy," by Raymond Vernon, and "Perspectives on Foreign Direct Investment From the Viewpoint of a Capital Receiving Country," by A. E. Safarain, both included within the issue. The reports' abilities to conclusively demonstrate the benefits or disadvantages of foreign capital investments through international business corporations are criticized, suggesting that the neoclassical economic model separating economic and political elements is insufficient.

The article is the author's response to a critique by Henry N. Goldstein to the author's article "A Neglected Aspect of Forward Exchange Theory and Policy" that appeared in the September 1963 issue of the journal. The author states that the theory behind triangular arbitrage is sound in that there are consequences to using foreign exchange rates to impact capital flows. One point made by Goldstein that the author agrees with is about what impact a third country would have on the forward commitments.

The article discusses the papers "International Capital Flows: Domestic and International Objectives of United States Monetary Policy," by Edward Bernstein, "Reconciliation of Domestic and International Objectives of Financial Policy: European Countries," by Milton Gilbert" and "The Changing Role of International Capital Flows," by Poul Host-Madsen. The author agrees with Bernstein in that some of the qualifications Gilbert eliminated from his work were too important not to be included. He thinks that there would not be high interest rates as Gilbert claims should the U.S. depend upon fiscal policy for the increase in expansion he discusses.

We use a comprehensive data set of funds-of-funds to investigate performance, risk, and capital formation in the hedge fund industry from 1995 to 2004. While the average fund-of-funds delivers alpha only in the period between October 1998 and March 2000, a subset of funds-of-funds consistently delivers alpha. The alpha-producing funds are not as likely to liquidate as those that do not deliver alpha, and experience far greater and steadier capital inflows than their less fortunate counterparts. These capital inflows attenuate the ability of the alpha producers to continue to deliver alpha in the future. [ABSTRACT FROM AUTHOR]

We present a simple rational model to highlight the effect of investors' participation costs on the response of mutual fund flows to past fund performance. By incorporating participation costs into a model in which investors learn about managers' ability from past returns, we show that mutual funds with lower participation costs have a higher flow sensitivity to medium performance and a lower flow sensitivity to high performance than their higher-cost peers. Using various fund characteristics as proxies for the reduction in participation costs, we provide empirical evidence supporting the model's implications for the asymmetric flow-performance relationship. [ABSTRACT FROM AUTHOR]

I exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample. Capital expenditures decline with mandatory contributions to DB pension plans, even when controlling for correlations between the pension funding status itself and the firm's unobserved investment opportunities. The effect is particularly evident among firms that face financing constraints based on observable variables such as credit ratings. Investment also displays strong negative correlations with the part of mandatory contributions resulting solely from unexpected asset market movements. [ABSTRACT FROM AUTHOR]

The article discusses aspects of international portfolio choice. In international portfolio models nations are defined as zones of common purchasing power units or as subsets of investors who use the same price index in deflating their anticipated monetary returns. Nations may further be separated by sovereignty of taxes and border controls, which constrain private financial transactions between countries. Analysts say nations can be meaningfully distinguished by Purchasing Power Parity deviations. It is reasonable to surmise that investors residing in different countries have different yardsticks for measuring real returns and risks.

We have constructed a simple two-sector model of the demand for housing and corporate capital. Economic growth and an increase in the inflation rate were then simulated with a number of model variants. The model and simulation experiments illustrate both the tax bias in favor of housing and the manner in which the increase in inflation between 1965 and 1978 magnified it. The existence of capital-market constraints offsets the bias against corporate capital, but it introduces a sharp, inefficient reallocation of housing from less wealthy, constrained households to wealthy households who do not have gains on mortgages and are not financially constrained. [ABSTRACT FROM AUTHOR]

This article examines whether capital flow restrictions, originally enacted for balance of payments reasons, also had the intended effect of isolating the national segments of the international equity market. Specific focus is given to measures adopted in the U.S., Great Britain and France. Arbitrage would assure that the market price of a security in one country would be equal to the market price of the same security in the second country, given that there are instantaneous information flows and no barriers to capital movements. However, the prices for a given security differs between markets, and such price differentials can be viewed as indicators of the impact of different capital control measures.

The article presents a study on the income velocity of circulation of the money supply. A structural macro-econometric model can be used to explain causality, such as expected increases in velocity accompanying rises in interest rates. The conclusions of the study indicate that velocity behaves as it does because it is the ratio of variables that respond differently to changes in the aggregate supply of money. It is shown that exogeneous monetary changes can cause changes in the velocity of circulation associated with variations in rates of economic growth and activity.

Does restriction of foreign investment improve the balance of payments of the lending country? The question is ambiguous until one decides what time horizon to assign both to the restrictions and to their impact. The effects of a single year's capital flows on the payments position for that year differ greatly from their effects on subsequent periods, which in turn differ from the impact of a whole stream of investments over several years on the balance of payments for one or many years. The choice of a time horizon appropriate for policy appraisal should be clear enough. Policymakers are responsible for all consequences of their actions or inaction from the moment of decision to the infinitely distant future. Any attempt to summarize the impact of policies bearing on foreign investments must therefore encompass the effects of all induced changes in investment on all subsequent time periods. The summary measures to be employed here are (1) an internal rate of discount for contributions to payments surplus and (2) the present value of all such contributions. [ABSTRACT FROM AUTHOR]

The article focuses on the sensitivity of short-term international capital movement to interest rate differentials, particularly highlighting the relationship between the deposit rates of the U.S. Treasury bill and Eurodollar. Both theoretical and empirical examinations into interest rate-capital flow reactions are provided. A flow model is given for the Eurodollar market with depositors as intermediaries and the Treasury bill as a rate determinant. The stock-rate adjustment equation of Koyak-Nerlove is also empirically applied to further evaluate the interest rate differentials and seek to validate the theoretical model presented.