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The International Diversification Puzzle Home Bias In Countries Investment Portfolios
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Book Synopsis The International Diversification Puzzle: Home Bias in Countries' Investment Portfolios by : Helena Kleinert
Download or read book The International Diversification Puzzle: Home Bias in Countries' Investment Portfolios written by Helena Kleinert and published by . This book was released on 2016 with total page 135 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The International Diversification Puzzle is Not as Bad as You Think by : Jonathan Heathcote
Download or read book The International Diversification Puzzle is Not as Bad as You Think written by Jonathan Heathcote and published by . This book was released on 2007 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract : In simple one-good international macro models, the presence of non-diversifiable labor income risk means that country portfoliosshould be heavily biased toward foreign assets. The fact that the opposite pattern of diversification is observed empirically constitutes the international diversification puzzle. We embed a portfolio choice decision in a frictionless two-country, two-good version of the stochastic growth model. In this environment, which is a workhorse for international business cycle research, we derive a closed-form expression for equilibrium country portfolios. These are biased towards domestic assets, as in the data. Home bias arises because endogenous international relative price fluctuations make domestic stocks a good hedge against non-diversifiable labor income risk. We then use our our theory to link openness to trade to the level of diversification, and find that it offers a quantitatively compelling account for the patterns of international diversification observed across developed economies in recent years.
Book Synopsis The International Diversification Puzzle when Goods Prices Are Sticky by : Mr.Charles Engel
Download or read book The International Diversification Puzzle when Goods Prices Are Sticky written by Mr.Charles Engel and published by International Monetary Fund. This book was released on 2009-01-01 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a two-country monetary DSGE model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some nominal goods prices are sticky. Trade in these assets achieves the same allocations as trade in a complete set of nominal state-contingent claims in our linearized model. When there is a high degree of price stickiness, we show that not much equity diversification is required to replicate the complete-markets equilibrium when agents are able to hedge foreign exchange risk sufficiently. Moreover, temporarily sticky nominal goods prices can have large effects on equity portfolios even when dividend processes are very persistent.
Book Synopsis International Diversification at Home and Abroad by : Fang Cai
Download or read book International Diversification at Home and Abroad written by Fang Cai and published by . This book was released on 2007 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is an established fact that investors favor the familiar%u2014be it domestic securities or, within a country, the securities of nearby firms%u2014and avoid investments that would provide the greatest diversification benefits. While we do not rule out familiarity as an important driver of portfolio allocations, we provide new evidence of investors%u2019 international diversification motive. In particular, our analysis of the security-level U.S. equity holdings of foreign and domestic institutional investors indicates that institutional investors reveal a preference for domestic multinationals (MNCs), even after controlling for familiarity factors. We attribute this revealed preference to the desire to obtain %u201Csafe%u201D international diversification. We then show that holdings of domestic MNCs are substantial and, after accounting for this home-grown foreign exposure, that the share of %u201Cforeign%u201D equities in investors%u2019 portfolios roughly doubles, reducing (but not eliminating) the observed home bias.
Book Synopsis The International Diversification Puzzle is Worse Than You Think by : Marianne Baxter
Download or read book The International Diversification Puzzle is Worse Than You Think written by Marianne Baxter and published by . This book was released on 1995 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: Although international financial markets are highly integrated across the more well-developed countries, investors nevertheless hold portfolios that consist nearly exclusively of domestic assets. This violation of the predictions of standard theories of portfolio choice is known as the 'international diversification puzzle.' In this paper, we show that the presence of nontraded risk associated with variations in the return to human capital has dramatic implications for the optimal fraction of domestic assets in an individual's portfolio. Our analysis suggests that the returns to human capital are highly correlated with the returns to domestic financial assets. Hedging the risk associated with nontraded human capital involves a short position in national equities in an amount approximately 1.5 times the value of the national stock market. Thus optimal and value- weighted portfolios very likely involve a short position in domestic marketable assets.
Book Synopsis The Determinants of International Portfolio Holdings and Home Bias by : Shujing Li
Download or read book The Determinants of International Portfolio Holdings and Home Bias written by Shujing Li and published by International Monetary Fund. This book was released on 2004-02 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Home Bias and the High Turnover by : Ingrid M. Werner
Download or read book Home Bias and the High Turnover written by Ingrid M. Werner and published by . This book was released on 1992 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis International Home Bias in International Finance and Business Cycles by : Karen K. Lewis
Download or read book International Home Bias in International Finance and Business Cycles written by Karen K. Lewis and published by . This book was released on 1998 with total page 80 pages. Available in PDF, EPUB and Kindle. Book excerpt: Domestic investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest. This phenomenon has been called equity home bias. In the absence of this home bias, investors would optimally diversify away domestic output risk. Therefore, in a world without investor home bias, consumption growth rates would tend to comove across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates. Moreover, consumption growth in each country appears to be highly correlated with its own output growth relative to the world. This phenomenon may be called consumption home bias. In this paper, I evaluate existing explanations for these two types of home bias.
Book Synopsis Home Bias and the High Turnover by : Linda L. Tesar
Download or read book Home Bias and the High Turnover written by Linda L. Tesar and published by . This book was released on 2010 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Equity Home Bias and the Euro by : Hisham S. Foad
Download or read book Equity Home Bias and the Euro written by Hisham S. Foad and published by . This book was released on 2007 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines explanations for the equity home bias puzzle by utilizing the introduction of the euro in 1999 as a natural experiment. Equity home bias is the observation that although investors could attain both lower risk and greater returns by increasing international diversification in their equity portfolios, they fail to do so. Currency risk, informational asymmetries, transaction costs, and investor sentiment have all been presented as explanations for the bias with varying degrees of success. The introduction of the euro and the coordination of monetary policy across the Euro Area (EA) allows for a closer examination of these potential explanations. Optimal foreign equity shares are derived from a version of the CAP-M and then empirically tested using detailed data from the IMF's Coordinated Portfolio Investment Survey covering the foreign equity holdings of 23 countries for the years 1997 and 2001-2004. The key results of this analysis are that while equity home bias has fallen worldwide over this period, by far the sharpest drop has been for intra-EA equity holdings with home bias falling from 68% to 29% between the pre and post-euro periods. Several explanations for this drop are tested, with the reduction in information asymmetries emerging as the most promising candidate.
Book Synopsis International Capital Flows by : Martin Feldstein
Download or read book International Capital Flows written by Martin Feldstein and published by University of Chicago Press. This book was released on 2007-12-01 with total page 500 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent changes in technology, along with the opening up of many regions previously closed to investment, have led to explosive growth in the international movement of capital. Flows from foreign direct investment and debt and equity financing can bring countries substantial gains by augmenting local savings and by improving technology and incentives. Investing companies acquire market access, lower cost inputs, and opportunities for profitable introductions of production methods in the countries where they invest. But, as was underscored recently by the economic and financial crises in several Asian countries, capital flows can also bring risks. Although there is no simple explanation of the currency crisis in Asia, it is clear that fixed exchange rates and chronic deficits increased the likelihood of a breakdown. Similarly, during the 1970s, the United States and other industrial countries loaned OPEC surpluses to borrowers in Latin America. But when the U.S. Federal Reserve raised interest rates to control soaring inflation, the result was a widespread debt moratorium in Latin America as many countries throughout the region struggled to pay the high interest on their foreign loans. International Capital Flows contains recent work by eminent scholars and practitioners on the experience of capital flows to Latin America, Asia, and eastern Europe. These papers discuss the role of banks, equity markets, and foreign direct investment in international capital flows, and the risks that investors and others face with these transactions. By focusing on capital flows' productivity and determinants, and the policy issues they raise, this collection is a valuable resource for economists, policymakers, and financial market participants.
Book Synopsis International Portfolio Choice, Liquidity Constraints and the Home Equity Bias Puzzle by : Alexander Michaelides
Download or read book International Portfolio Choice, Liquidity Constraints and the Home Equity Bias Puzzle written by Alexander Michaelides and published by . This book was released on 2008 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper solves for optimal international portfolio choice in the presence of liquidity constraints and undiversifiable labor income risk. Optimal portfolios are internationally diversified while positive correlation between domestic stock market returns and permanent labor income shocks can generate a complete portfolio specialization in foreign stocks. Nevertheless, either small costs associated with investing abroad or a slightly positive domestic to foreign equity premium differential are suffcient to either deter households from participating in a foreign market or generate a substantial bias for home equities. The benefits of international diversification are limited because consumption fluctuations can be smoothed with a small amount of buffer stock saving, while exchange rate risk makes foreign investments less appealing to risk averse investors.
Book Synopsis Familiarity Breeds Investment by : Hisham S. Foad
Download or read book Familiarity Breeds Investment written by Hisham S. Foad and published by . This book was released on 2008 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: Why do investors hold such large positions in domestic equity when there are gains to be made from international diversification? This equity home bias puzzle has received considerable attention in the literature, with asymmetric information on domestic and foreign assets (whether by individual choice or by market imperfection) emerging as the most plausible explanation. If investors have relatively better information about local equities, what happens when we consider a subset of investors whose information sets are closer in line to investors in foreign countries? I assess the relationship between immigration and equity home bias and find that inward migration is positively correlated with increased foreign equity positions and reduced home bias. Looking across income groups, outward migration appears to reduce home bias for relatively rich countries, but may actually increase home bias when migration occurs to or from a developing country. These results suggest that immigration generates an external benefit of increased information flows between developed countries, but not for developing nations. That immigration tends to reduce equity home bias lends further credence to the information asymmetry explanation for the puzzle and supports recent work suggesting that this asymmetry is the result of optimizing behavior.
Book Synopsis International Portfolio Choice, Liquidity Constraints and the Home Equity Bias Puzzle by : Alexander George Michaelides
Download or read book International Portfolio Choice, Liquidity Constraints and the Home Equity Bias Puzzle written by Alexander George Michaelides and published by . This book was released on 2001 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Three Essays in International Portfolio Diversification by : Amir Andrew Amadi
Download or read book Three Essays in International Portfolio Diversification written by Amir Andrew Amadi and published by . This book was released on 2004 with total page 226 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Home Sweet Home by : Anders Karlsson
Download or read book Home Sweet Home written by Anders Karlsson and published by . This book was released on 2007 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: A striking feature of international portfolio investment is the extent to which equity portfolios are concentrated in the domestic market of the investor. Many authors have tried to explain this home bias, but so far, this literature has not succeeded in providing a generally accepted explanation for it. Also, there are no previous results regarding home bias on an individual level, i.e. what characterises an individual who show a relatively large reluctance towards international diversification and investments. The purpose of this study is to investigate whether there is a home bias in the portfolios of mutual funds, which are formed as a part of the pension plan in Sweden. While controlling for several reasons for home bias which are found in the previous research, as e.g. transactions costs and risk level of investments, this study analyses the nature of portfolio allocation and the home bias on an individual investor basis. A multinomial logit model is formulated to estimate the likelihood of home bias, where demographical features of the individuals are used as explanatory variables. The results show several significant, statistically and economically, relationships between individual characteristics and the likelihood of home bias. In particular, age, gender, net wealth, occupation and familiarity with risky investments are important. The type of individual with the highest likelihood of home bias is identified as a not so wealthy older man, who works for the government and holds no other risky assets.
Book Synopsis Portfolio Diversification by : Francois-Serge Lhabitant
Download or read book Portfolio Diversification written by Francois-Serge Lhabitant and published by Elsevier. This book was released on 2017-09-26 with total page 276 pages. Available in PDF, EPUB and Kindle. Book excerpt: Portfolio Diversification provides an update on the practice of combining several risky investments in a portfolio with the goal of reducing the portfolio's overall risk. In this book, readers will find a comprehensive introduction and analysis of various dimensions of portfolio diversification (assets, maturities, industries, countries, etc.), along with time diversification strategies (long term vs. short term diversification) and diversification using other risk measures than variance. Several tools to quantify and implement optimal diversification are discussed and illustrated. Focuses on portfolio diversification across all its dimensions Includes recent empirical material that was created and developed specifically for this book Provides several tools to quantify and implement optimal diversification
