Nonlinearities and a Pecking Order in Cross-Border Investment

Nonlinearities arise in international investment because of a pecking order in barriers. Some severe barriers render all others meaningless, and only when alleviated do other barriers become important. Quantile regressions, designed to model relations at more points than just the conditional mean, allow us to test various investment theories at different points in the distribution of bilateral cross-border equity holdings. Support is broadest for roles for information and familiarity but more limited for transaction costs. Our results can also help reconcile a number of findings in the literature by highlighting that datasets which focus on different points of the barriers (investment) distribution can naturally lead to different results. Going forward, as the literature focuses on specialized datasets and granularity / asset demand systems, analysis should incorporate nonlinearities inherent in cross-border barriers and investment