IDEAS home Printed from https://ideas.repec.org/p/mea/meawpa/04061.html
   My bibliography  Save this paper

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

Author

Listed:
  • Barbara Berkel

    () (Munich Center for the Economics of Aging (MEA))

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 on the portfolio share of foreign equities.

Suggested Citation

  • Barbara Berkel, 2004. "Institutional Determinants of International Equity Portfolios - A Country-Level Analysis," MEA discussion paper series 04061, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  • Handle: RePEc:mea:meawpa:04061
    as

    Download full text from publisher

    File URL: http://mea.mpisoc.mpg.de/uploads/user_mea_discussionpapers/zgjavhhcpsmif2jn_61.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Vlachos, Jonas, 2004. "Does Regulatory Harmonization Increase Bilateral Asset Holdings?," CEPR Discussion Papers 4417, C.E.P.R. Discussion Papers.
    2. 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.
    3. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214.
    4. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    5. Bekaert, Geert & Harvey, Campbell R. & Lumsdaine, Robin L., 2002. "Dating the integration of world equity markets," Journal of Financial Economics, Elsevier, vol. 65(2), pages 203-247, August.
    6. Vittorio Grilli & Gian Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 517-551, September.
    7. Brennan, Michael J & Cao, H Henry, 1997. " International Portfolio Investment Flows," Journal of Finance, American Finance Association, vol. 52(5), pages 1851-1880, December.
    8. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
    9. Daron Acemoglu & Simon Johnson & James A. Robinson, 2002. "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1231-1294.
    10. Axel Boersch-Supan & Florian Heiss & Alexander Ludwig & Joachim Winter, 2003. "Pension Reform, Capital Markets and the Rate of Return," German Economic Review, Verein für Socialpolitik, vol. 4(2), pages 151-181, May.
    11. Dahlquist, Magnus & Pinkowitz, Lee & Stulz, René M. & Williamson, Rohan, 2003. "Corporate Governance and the Home Bias," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 87-110, March.
    12. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    13. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
    14. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
    15. Karolyi, G. Andrew & Stulz, Rene M., 2003. "Are financial assets priced locally or globally?," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 16, pages 975-1020 Elsevier.
    16. Akira Ariyoshi & Andrei A Kirilenko & Inci Ötker & Bernard J Laurens & Jorge I Canales Kriljenko & Karl F Habermeier, 2000. "Capital Controls; Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
    17. Swati Ghosh & Holger Wolf, 2000. "Is There a Curse of Location? Spatial Determinants of Capital Flows to Emerging Markets," NBER Chapters,in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 137-156 National Bureau of Economic Research, Inc.
    18. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October.
    19. repec:hrv:faseco:30728041 is not listed on IDEAS
    20. Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004. "Information costs and home bias: an analysis of US holdings of foreign equities," Journal of International Economics, Elsevier, vol. 62(2), pages 313-336, March.
    21. Melanie Lührmann, 2003. "Demographic Change, Foresight and International Capital Flows," MEA discussion paper series 03038, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    22. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-934, September.
    23. Christopher J. Neely, 1999. "An introduction to capital controls," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 13-30.
    24. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 97-109.
    25. Cooper, Ian & Kaplanis, Evi, 1994. "Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 45-60.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. Mounira Chniguir & Mohamed Karim Kefi & Jamel Eddine Henchiri, 2017. "The Determinants of Home Bias in Stock Portfolio: An Emerging and Developed Markets Study," International Journal of Economics and Financial Issues, Econjournals, vol. 7(6), pages 182-191.
    3. 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.
    4. Giofré, Maela/M., 2008. "EMU Effects on Stock Markets: From Home Bias to Euro Bias," MPRA Paper 13926, University Library of Munich, Germany.
    5. Roque, Vanda & Cortez, Maria Céu, 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.
    6. Giofré, Maela, 2009. "The role of information asymmetries and inflation hedging in international equity portfolios," Journal of Multinational Financial Management, Elsevier, vol. 19(4), pages 237-255, October.
    7. repec:ecb:ecbwps:20141799 is not listed on IDEAS
    8. Giofré, Maela M., 2008. "Bias in foreign equity portfolios: households versus professional investors," MPRA Paper 13929, University Library of Munich, Germany.
    9. repec:eee:revfin:v:33:y:2017:i:c:p:41-54 is not listed on IDEAS
    10. Barbara Berkel, 2006. "The EMU and German Cross-Border Portfolio Flows," MEA discussion paper series 06110, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    11. 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.
    12. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, vol. 87(2), pages 205-215.
    13. 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.
    14. 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.
    15. MacDonald, Margaux, 2018. "International Capital Market Frictions and Spillovers from Quantitative Easing," Queen's Economics Department Working Papers 274672, Queen's University - Department of Economics.
    16. 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.).
    17. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mea:meawpa:04061. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Henning Frankenberger). General contact details of provider: http://www.mea.mpisoc.mpg.de/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.