Role of Real Exchange Rate Volatility in Global Equity Home Bias

Abstract

The paper employs the International Monetary Fund's high quality dataset (2001 to 2005) on cross border equity investment for 46 source and 200 host countries, including both mature and emerging economies to construct the float adjusted measure of home bias and examines the impact of real exchange rate volatility on global equity home bias. This paper develops a model for tax related to source country investor's foreign equity returns and also investigates the impact of real exchange rate volatility on equity home bias in presence of tax as a control measure. On the empirical front, the paper uses different control measures; various source countries groups and conducts generalised method of moments robustness tests to examine the role of real exchange rate volatility as a potential source of global equity home bias. The paper finds that real exchange rate volatility is an important factor affecting global equity home bias.