Long-term determinants of valuation effects

Abstract

The progression of financial globalization increases the importance of valuation changes of foreign assets and liabilities, similar to that of current account in explaining the recent net foreign asset position of countries around the world. This study analyzes the long-term determinants of valuation effects by using panel regression with 10-year data span of 188 countries. The main findings are as follows. First, the size of foreign assets and relative portion of risky assets are positively associated with valuation effects, which suggests that general principles for long-term individual investors also hold for an entire country. Second, current account is negatively associated with valuation effects, which suggests that these two mechanisms stabilize each other in overall international adjustment process. Third, exchange rate changes are often positively associated with valuation effects, which at times depend on foreign asset and liability positions. Fourth, per capita GDP are negatively associated with valuation effects. Fifth, current account is mainly associated with valuation effects due to asset price changes, but exchange rate changes and foreign asset and liability positions are mainly associated with valuation effects due to exchange rate changes. The relative proportion of risky assets is associated with both types of valuation effects.