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The Determinants of International Portfolio Holdings and Home Bias

Author/Editor: Faruqee, Hamid | Li, Shujing | Yan, Isabel K.
Authorized for Distribution: February 1, 2004
Electronic Access: Free Full Text (PDF file size is 252KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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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Series: Working Paper No. 04/34
Subject(s): International capital markets | Capital flows | Capital inflows | Economic models
Author's keyword(s): International portfolio choice | Home bias | Transaction cost | Information cost
    Published:   February 1, 2004        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA0342004   Pages:   25
    Price:   US$15.00 (Academic Rate: US$15.00 )
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