Katharina Bergant, Trinity College Dublin

“Valuation Effects and Capital Flows: Security Level Evidence from Euro Area Investors”

We use confidential microdata on security holdings of all euro area investors to analyze portfolio rebalancing patterns in response to valuation changes. Our empirical findings provide evidence for “momentum investment” as investors show larger net purchases of securities which experience relatively higher valuation gains. This pattern is stronger for institutional investors (banks, investment funds, and insurance companies and pension funds) than for households or non-financial corporations and particularly pronounced in euro area countries less affected by the recent financial crisis. For securities denominated in foreign currency (i.e. non-euro), momentum investment is significantly stronger and driven by valuation gains from exchange rate dynamics rather than changes in market prices. Our analysis is consistent with a decreasing share of home currency holdings in euro area investors' portfolios, albeit from high levels, driven by rebalancing towards the US dollar and other foreign currencies over the past  five years.

Contact person: Peter Norman Sørensen