IMF Working Papers

A Gravity Model of Geopolitics and Financial Fragmentation

By Mario Catalan, Salih Fendoglu, Tomohiro Tsuruga

September 13, 2024

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Format: Chicago

Mario Catalan, Salih Fendoglu, and Tomohiro Tsuruga. "A Gravity Model of Geopolitics and Financial Fragmentation", IMF Working Papers 2024, 196 (2024), accessed November 15, 2024, https://doi.org/10.5089/9798400280337.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Do geopolitical tensions between countries influence the cross-border asset allocation of investment funds? Our answer is yes. We estimate gravity models and find that investment funds allocate smaller shares of their portfolios to recipient countries that are geopolitically more distant to their country of origin—with geopolitical distance measured by dissimilarity in countries’ voting behavior in the United Nations General Assembly. We also find an investment diversion effect: a recipient country attracts additional investments when its source countries get geopolitically more distant to third-party countries. These results are robust to instrumenting geopolitical distance and using alternative distance measures.

Subject: Asset allocation, Asset and liability management, Bonds, Econometric analysis, Estimation techniques, Financial institutions, International trade, Mutual funds, Plurilateral trade

Keywords: Asset allocation, Bonds, Country pair, Cross-border, Estimation techniques, Fragmentation, Geoeconomics, Geopolitical distance, Geopolitics, Global, Globalization, Gravitymodel, International finance., Investment diversion effect, Investment funds, Middle East, Mutual funds, Plurilateral trade, Portfolioflows, Recipient country, Recipient-country time

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