The European Union and Eurozone present an inquisitive case of strongly interconnected network with high degree of dependence among nodes. This research focused on investment network of European Union and its major trading partners for specific time period 2001 to 2014. The changing investment patterns within Eurozone suggest strong financial and trade links with central and large economies. This study is about the association between portfolio investment and economic indicators with respect to financial networks. The analysis used the strongly connected investment network of Eurozone and its large trading partners. A strong correlation between, increasing or decreasing investment patterns with economic indicators of particular economy was found. Interestingly correlation patterns for network members other than Eurozone states were not as strong and depicted mild behavior. This as well, explains the significance of interconnectedness level among nodes of one network with varying centrality measures. Investment network visualization techniques helped to validate the results based on network`s statistical measures.
Deep Dive into Foreign Portfolio Investment and Economy: The Network Perspective.
The European Union and Eurozone present an inquisitive case of strongly interconnected network with high degree of dependence among nodes. This research focused on investment network of European Union and its major trading partners for specific time period 2001 to 2014. The changing investment patterns within Eurozone suggest strong financial and trade links with central and large economies. This study is about the association between portfolio investment and economic indicators with respect to financial networks. The analysis used the strongly connected investment network of Eurozone and its large trading partners. A strong correlation between, increasing or decreasing investment patterns with economic indicators of particular economy was found. Interestingly correlation patterns for network members other than Eurozone states were not as strong and depicted mild behavior. This as well, explains the significance of interconnectedness level among nodes of one network with varying centra
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Foreign Portfolio Investment and Economy: The Network Perspective
Muhammad Mohsin Hakeem*1
Doctoral Fellow, Graduate School of Economics and Management, Tohoku University,
Ken-ichi Suzuki
Associate Professor, Graduate School of Economics and Management, Tohoku University, Sendai,
Japan
Abstract
The European Union and Eurozone present an inquisitive case of strongly interconnected
network with high degree of dependence among nodes. This research focused on investment
network of European Union and its major trading partners for specific time period (2001-14).
The changing investment patterns within Eurozone suggest strong financial and trade links with
central and large economies. This study is about the association between portfolio investment
and economic indicators with respect to financial networks. The analysis used the strongly
connected investment network of Eurozone and its large trading partners. A strong correlation
between, increasing or decreasing investment patterns with economic indicators of particular
economy was found. Interestingly correlation patterns for network members other than
Eurozone states were not as strong and depicted mild behavior. This as well, explains the
significance of interconnectedness level among nodes of one network with varying centrality
measures. Investment network visualization techniques helped to validate the results based on
network’s statistical measures.
Keywords: European Union, Eurozone, Investment Network, Economic Indicators, Centrality
Measures, Network Visualization
INTRODUCTION
Portfolio investment is one of the major indicators of investor friendly and good
performing equity markets of a single country. The rate of return is for sure the most prominent
factor behind investment decision but ease of access, financial stability and lower level of
taxation do play evident role in final decision of investment managers regarding liquidity flows.
Being a part of an investment network, either week or strong, can open up new possibilities to
attract foreign investors by making markets more visible and investor friendly. The networks
such as European Union (EU) or Eurozone are supposed to influence the investment flows for
any particular nodes within, due to strong connectivity patterns and possibility of small clusters.
This study explores the details of individualistic or local characteristics of every node within
investment network. Mainly the connectivity patterns, closeness within network or possibility
of large nodes in neighborhood. All these characteristics can influence the portfolio investment
flows for any particular country. The objective of this study is to analyze the connectivity
patterns with network and major economic indicators of any country to find the possible
connection or correlation in-between. In other words, if economic stability or deterioration with
respect to certain indicators can be associated with strong or weak connectivity patterns with
network as a resultant economic state of affairs.
Association or linkage does not have implications for causality. The strong linkage
with network and higher or improved economic indicators may or may not represent the
underlying causes but would reflect on different possibilities. To understand these phenomena
we used investment network of Europe Union with focus on individualistic characteristics of
1“hakeem514@tohoku.ac.jp”
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nodes. Based on criteria concerning closeness and connectivity nodes were divided into
different Tiers. At least one node from every Tier was selected to build correlation matrix based
on networks measures and relevant economic indicators to understand the relationship between
network position, economic stability and attractiveness for investors. The network is based on
coordinated portfolio investment survey (CPIS) database compiled and published by
International Monetary Fund (IMF) regularly.
RELATION TO THE LITERATURE
The discussion on the relationship between portfolio investment and economy is not
new rather a continuous process of development, enhanced understanding and evaluation of
different perspectives. Portfolio investment and associated concepts are such as, its
determinants, investor protection, efficiency of capital markets, flow determinants and patterns,
exchange rate movements and information mobility are few to mention. The economic relations
are also part of widely available literature. Such as Rogoff (1999) focused on considerable
change from debt to equity financing within economy and equity investment flows increases
accordingly. Bekaert & Harvey (1998) confirm the direct impact of private equity investment
on macroeconomic performance of emerging market. They also confirmed the impact of
portfolio investment on economic growth and stability of emerging economies in Bekaert &
Harvey (2000). Their later paper
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