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Immigration and equity home bias

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  • Foad, Hisham

Abstract

Why do investors hold such large positions in domestic equity when there are gains to be made from international diversification? This equity home bias puzzle has received considerable attention in the literature, with asymmetric information on domestic and foreign assets (whether by individual choice or by market imperfection) emerging as the most plausible explanation. What happens when we consider a subset of investors whose information sets are closer to investors in foreign countries? I assess the relationship between immigration and equity home bias and find that inward migration is positively correlated with increased foreign equity positions and reduced home bias. Looking across income groups, outward migration reduces home bias for relatively rich countries, but may actually increase home bias when migration occurs to or from a developing country. These results suggest that immigration generates a positive externality of increased information flows for developed countries, but not for developing nations. The effects of immigration on investment are strongest within the Euro-Zone, suggesting that this positive externality of immigration is largest when barriers to portfolio diversification (such as currency risk) are lowest.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 6 (October)
Pages: 982-998

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:6:p:982-998

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Equity home bias Immigrant networks Migration and foreign investment;

References

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  1. Bhattacharya, Utpal & Groznik, Peter, 2008. "Melting pot or salad bowl: Some evidence from U.S. investments abroad," Journal of Financial Markets, Elsevier, vol. 11(3), pages 228-258, August.
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Cited by:
  1. Dr Max Nathan, 2013. "The Wider Economic Impacts Of High-Skilled Migrants: A Survey Of The Literature," NIESR Discussion Papers 11607, National Institute of Economic and Social Research.

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