We analyze the relationship between international capital flows and past and prospective returns using portfolio-based measures. In contrast to long-standing conclusions from the flows-based literature, we find no evidence of momentum trading. Rather, we show that with respect to their foreign portfolios U.S. investors can be characterized as contrarian when selling (that is, they sell past winners). We also show that there is some evidence of a positive relationship between portfolio reallocations and future returns; on average U.S. investors increase portfolio weights on a country’s equity market just prior to its strong performance. Overall, by our estimation U.S. investors have outperformed the value-weighted foreign equity benchmark by a substantial 180 basis points per year.
Joint work with Stephanie E. Curcuru and Charles P. Thomas (Board of Governors of the Federal Reserve System) and Jon Wongswan (Barclays Global Investors).