Reassessing international investment patterns: a revisitation of Lane and Milesi-Ferretti's evidence.

We show that recent methodological advances in econometric theory raise questions about the results obtained by Lane and Milesi-Ferretti (LMF) in relation to the determinants of international investment patterns (International Investment Patterns, The Review of Economics and Statistics 2008; 90(3): 538{549). We find that LMF's estimated equations are affected by heteroscedasticity (which can lead to inconsistent estimates in log-linearized models), and that the results depend on the pattern of heteroscedasticity assumed and on the estimation method applied. Thus, LMF's findings need to be reassessed. Moreover, we extend the dataset over time to estimate the panel version of the LMF's equations (over years 2001{2009). Our panel allows for the proper accounting of unobserved heterogeneity through country-pair fixed effects and improves the cross-section analysis reconciling empirical evidence with economic theory. Irrespective of the estimation method, we identify a clear diversification motive which drives international equity purchases.