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Home Bias and the High Turnover

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Author Info
Linda L. Tesar
Ingrid M. Werner

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Abstract

This paper documents the available evidence on international portfolio investment in five GECD countries. We draw three conclusions from the data. First. there is strong evidence of a home bias in national investment portfolios despite the potential gains from international diversification. Second, to the extent investors hold international securities, the composition of the portfolio of foreign securities seems to reflect factors other than diversification of risk. Third, the high volume of cross-border capital flows and the high turnover rate on foreign equity investments relative to domestic equity markets suggests that transactions costs and incomplete information are unlikely to be important deterrents to international investment. These observations suggest that a richer set of models is required to account for international investment behavior.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4218.

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Date of creation: Nov 1992
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Publication status: published as Journal of International Money and Finance, vol 14, no. 4, pp 467-492, 1995
Handle: RePEc:nbr:nberwo:4218

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  1. French, K.R. & Poterba, J.M., 1990. "Are Japanese Stock Prices Too High?," Working papers 547, Massachusetts Institute of Technology (MIT), Department of Economics.
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  2. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Solnik, Bruno H., 1974. "An equilibrium model of the international capital market," Journal of Economic Theory, Elsevier, vol. 8(4), pages 500-524, August. [Downloadable!] (restricted)
  4. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March. [Downloadable!] (restricted)
  5. Kawai, M., 1991. "Japanese Investment in Foreign Securities in the 1980's," UBC Departmental Archives 91-37, UBC Department of Economics.
  6. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-84, June. [Downloadable!] (restricted)
  7. Lois E. Stekler & Edwin M. Truman, 1992. "The adequacy of the data on U.S. international financial transactions: a Federal Reserve perspective," International Finance Discussion Papers 430, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-75, September. [Downloadable!] (restricted)
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  1. Claudia M. Buch, 2000. "Are Banks Different? Evidence from International Data," Kiel Working Papers 1012, Kiel Institute for the World Economy. [Downloadable!]
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  2. Javier Santillán & Marc Bayle & Christian Thygesen, 2000. "The impact of the euro on money and bond markets," Occasional Paper Series 1, European Central Bank. [Downloadable!]
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