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What makes investors over or underweight? explaining international appetites for foreign equities

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  • Carol C. Bertaut
  • Linda S. Kole
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    Abstract

    Using data from the IMF Coordinated Portfolio Investment Surveys conducted in 2001, we analyze the determinants of 31 countries' international equity holdings. We show that investors in all countries underweight U.S. equities in their portfolios, many by more than they underweight foreign equities in general. Such behavior is surprising given the common perception of the United States as a desirable investment destination due to its well-developed legal and regulatory environment. Instead we find that investors in some countries are overweight in equities from other countries with which they have close regional or political ties. Such ties, along with distance, trade, issuance of U.S. ADRs or cross-listing on the London Stock exchange, market concentration, and estimated betas, help explain patterns of diversification. However, even when all these variables are included, we find significant fixed effects for most countries, suggesting that a considerable amount of cross-country variation in investment positions and in home bias remains to be explained. Our work confirms previous findings and extends results most completely documented for the United States to other major investor countries. But it also suggests caution should be used when interpreting results derived from studies of one or a few countries.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 819.

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    Date of creation: 2004
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    Handle: RePEc:fip:fedgif:819

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    Keywords: Investments; Foreign ; International finance;

    This paper has been announced in the following NEP Reports:

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    1. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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    Citations

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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 iiisdp104, IIIS.
    2. 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 iiisdp140, IIIS.
    3. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
    4. Kristin J. Forbes, 2008. "Why do Foreigners Invest in the United States?," NBER Working Papers 13908, National Bureau of Economic Research, Inc.
    5. Andrew Swiston, 2005. "A Global View of the U.S. Investment Position," IMF Working Papers 05/181, International Monetary Fund.
    6. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2006. "Capital Flows to Central and Eastern Europe," IMF Working Papers 06/188, International Monetary Fund.
    7. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, vol. 87(2), pages 205-215.
    8. Ferreira, Miguel A. & Miguel, Antonio F., 2011. "The determinants of domestic and foreign bond bias," Journal of Multinational Financial Management, Elsevier, vol. 21(5), pages 279-300.
    9. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2007. "Home bias in global bond and equity markets: The role of real exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 631-655, June.
    10. Ahmed Zoromé, 2007. "Concept of offshore Financial Centers," IMF Working Papers 07/87, International Monetary Fund.

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