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Home Bias, Transactions Costs, and Prospects for the Euro: A More Detailed Analysis

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  • Catherine L. Mann
  • Ellen E. Meade

Abstract

This paper brings together the literature on determination of home bias in equity holdings and the portfolio balance model of exchange rates to consider whether the dollar might be affected by a change in transactions costs that alters international portfolio allocations. Our empirical findings lend support to the view that transactions costs have a significant influence on US portfolio holdings, even after accounting for float market share. In addition, new survey evidence on the equity holdings of European firms indicates home bias for European investors, and points to a reduction in the magnitude of this home bias since 1997.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0537.

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Date of creation: Jun 2002
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Handle: RePEc:cep:cepdps:dp0537

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: portfolio choice; equity flows; exchange rates;

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References

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  1. Sue Fernie & Helen Gray, 2002. "Its a Family Affair: the Effect of Union Recognition and Human Resource Management on the Provision of Equal Opportunities in the UK," CEP Discussion Papers, Centre for Economic Performance, LSE dp0525, Centre for Economic Performance, LSE.
  2. Marco Pagano & Otto Randl & Ailsa A. Röell & Josef Zechner, 2000. "What Makes Stock Exchanges Succeed? Evidence from Cross-Listing Decisions," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 50, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Ron Alquist & Menzie D. Chinn, 2002. "Productivity and the Euro-Dollar Exchange Rate Puzzle," NBER Working Papers 8824, National Bureau of Economic Research, Inc.
  4. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 691, Board of Governors of the Federal Reserve System (U.S.).
  5. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
  6. Adjaoute, K. & Danthine, J.P., 2001. "Portfolio Diversification: Alive and well In Euroland," Papers, Manitoba - Department of Economics 32, Manitoba - Department of Economics.
  7. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  8. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(4), pages 467-492, August.
  9. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
  10. Richard Portes & Hélène Rey, 2001. "The Determinants of Cross-Border Equity Flows," DELTA Working Papers, DELTA (Ecole normale supérieure) 2001-08, DELTA (Ecole normale supérieure).
  11. Robin Brooks & Torsten Sløk & Manmohan S. Kumar & Hali J. Edison, 2001. "Exchange Rates and Capital Flows," IMF Working Papers 01/190, International Monetary Fund.
  12. Fratzscher, M., 2001. "Financial Market Integration in Europe: On the Effects of EMU on Stock Markets," Papers 48, Quebec a Montreal - Recherche en gestion.
  13. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, Elsevier, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier.
  14. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
  15. Francis E. Warnock, 2001. "Home bias and high turnover reconsidered," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 702, Board of Governors of the Federal Reserve System (U.S.).
  16. Adjaoute, Kpate & Danthine, Jean-Pierre, 2001. "EMU and Portfolio Diversification Opportunities," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2962, C.E.P.R. Discussion Papers.
  17. Pagano, Marco & Röell, Ailsa A & Zechner, Josef, 2001. "The Geography of Equity Listing: Why Do Companies List Abroad?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2681, C.E.P.R. Discussion Papers.
  18. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
  19. Francis E. Warnock & Chad Cleaver, 2002. "Financial centers and the geography of capital flows," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 722, Board of Governors of the Federal Reserve System (U.S.).
  20. Hans-Werner Sinn & Frank Westermann, 2001. "Why Has the Euro Been Falling?," CESifo Working Paper Series 493, CESifo Group Munich.
  21. Guy Meredith, 2001. "Why Has the Euro Been so Weak?," IMF Working Papers 01/155, International Monetary Fund.
  22. Cedric Tille & Nicolas Stoffels & Olga Gorbachev, 2001. "To what extent does productivity drive the dollar?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 7(Aug).
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Cited by:
  1. Philip Lane & Gian Maria Milesi-Ferretti, 2005. "The International Equity Holdings of Euro Area Investors," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp104, IIIS.
  2. Balli, Faruk & Osman, Mohammad & Louis, Rosmy J., 2008. "International Portfolio Inflows to GCC Markets. Are There any General Patterns?," MPRA Paper 10158, University Library of Munich, Germany.
  3. Acharya, Viral V & Bisin, Alberto, 2003. "Optimal Financial Market Integration and Security Design," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3852, C.E.P.R. Discussion Papers.
  4. Anne Marie Gleeson & Frances Ruane, 2006. "Export dynamics in Small Open Economies: Indigenous Irish Manufacturing Exports, 1985-2003," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp140, IIIS.
  5. Carol C. Bertaut & Linda S. Kole, 2004. "What makes investors over or underweight? explaining international appetites for foreign equities," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 819, Board of Governors of the Federal Reserve System (U.S.).
  6. Faruk, Balli, 2006. "New Patterns in International Portfolio Allocation and Income Smoothing," MPRA Paper 10121, University Library of Munich, Germany, revised 14 Aug 2008.

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