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The Determinants of International Portfolio Holdings and Home Bias

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  • Shujing Li
  • Hamid Faruqee
  • Isabel K. Yan

Abstract

Despite the liberalization of foreign portfolio investment around the globe since the early 1980s, the home-bias phenomenon is still found to exist. Using a relatively new IMF survey dataset of cross-border equity holdings, this paper tests new structural equations from a consumption-based asset-pricing model on international portfolio holdings. Using of stock data allows us to provide new and clear-cut evidence on the determinants of international portfolio holdings. The empirical results show that an augmented gravity model performs remarkably well. The results indicate that market size, transaction cost, and information asymmetry are major determinants of cross-border portfolio choice. These findings shed light on alternative theories of international portfolio holdings, especially on the transaction and information cost-based explanations of home bias.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/34.

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Length: 25
Date of creation: 01 Feb 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/34

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Related research

Keywords: Capital flows; Capital inflows; Economic models; equation; correlation; market size; survey; statistics; foreign assets; equations; portfolio investment; prediction; instrumental variables; logarithm; statistic; market sizes; independent variables; international investment; equity flows; significance level; standard errors; foreign investors; foreign ownership; foreign asset; explanatory power; foreign investments; optimization; international trade; regression analysis; descriptive statistics; foreign investment; maximization model; predictions; investment decisions; constant term; estimation result; foreign markets; correlations; dummy variable; coefficient vector; international investments; dummy variables;

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References

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  1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
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  5. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 95(1), pages 97-109.
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  7. Iftekhar Hasan & Yusif Simaan, 1999. "A Rational Explanation For Home Country Bias," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-067, New York University, Leonard N. Stern School of Business-.
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  13. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, American Economic Association, vol. 81(2), pages 222-26, May.
  14. Richard Portes and H�l�ne Rey., 2000. "The Determinants of Cross-Border Equity Flows: The Geography of Information," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C00-111, University of California at Berkeley.
  15. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, American Economic Association, vol. 67(5), pages 942-48, December.
  16. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, American Finance Association, vol. 38(3), pages 925-84, June.
  17. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, Elsevier, vol. 51(1), pages 79-113, June.
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