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Institutional Determinants of International Equity Portfolios - A Country-Level Analysis

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  • Berkel Barbara

    () (MEA, Mannheim University)

Abstract

Despite large potential gains, international equity investment is less diversified across countries than predicted by the international version of the traditional capital asset pricing model (ICAPM). This paper provides empirical evidence on the impact of capital market frictions on international equity portfolios using data on bilateral equity holdings. Two important findings are reported: First, besides a home bias in equities, a 'friendship bias' can be observed for some country pairs. Second, indirect barriers such as the degree of financial market development and especially information asymmetries have strong explanatory power, whereas direct barriers such as capital flow restrictions have no impact.

Suggested Citation

  • Berkel Barbara, 2007. "Institutional Determinants of International Equity Portfolios - A Country-Level Analysis," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-33, October.
  • Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:34
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    References listed on IDEAS

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    1. Christopher J. Neely, 1999. "An introduction to capital controls," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 13-30.
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    Cited by:

    1. Beugelsdijk, Sjoerd & Frijns, Bart, 2010. "A cultural explanation of the foreign bias in international asset allocation," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2121-2131, September.
    2. Vermeulen, Robert, 2013. "International diversification during the financial crisis: A blessing for equity investors?," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 104-123.
    3. Roque, Vanda & Cortez, Maria CĂ©u, 2014. "The determinants of international equity investment: Do they differ between institutional and noninstitutional investors?," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 469-482.
    4. repec:ecb:ecbwps:20141799 is not listed on IDEAS
    5. repec:eee:revfin:v:33:y:2017:i:c:p:41-54 is not listed on IDEAS
    6. Baltzer, Markus & Stolper, Oscar & Walter, Andreas, 2013. "Is local bias a cross-border phenomenon? Evidence from individual investors’ international asset allocation," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2823-2835.
    7. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, pages 205-215.
    8. MacDonald, Margaux, 2017. "International capital market frictions and spillovers from quantitative easing," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 135-156.
    9. Habib, Maurizio Michael & Floreani, Vincent Arthur, 2015. "Financial exposure to the euro area before and after the crisis: home bias and institutions at home," Working Paper Series 1799, European Central Bank.
    10. Carol C. Bertaut, 2008. "Assessing the potential for further foreign demand for U.S. assets: Has financing U.S. current account deficits made foreign investors overweight in U.S. securities?," International Finance Discussion Papers 950, Board of Governors of the Federal Reserve System (U.S.).
    11. Cheung, Yin-Wong & Friedman, Daniel, 2009. "Speculative attacks: A laboratory study in continuous time," Journal of International Money and Finance, Elsevier, pages 1064-1082.

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