Turkish Investors’ Foreign Portfolio Investments

Abstract

The objective of this paper is to examine Turkish investors’ foreign asset holdings from the perspective of both the “international portfolio diversification” and the “home bias” literature using asset holdings data from the IMF’s “Coordinated Portfolio Investment Survey” (CPIS). For years, the scope of the related empirical literature had been bounded with limited data availability since the estimation of cross-border investment positions using flows data would be misleading (see Warnock F., 2002, Home Bias and High Turnover Reconsidered, Journal of International Money and Finance). Despite some shortcomings, the CPIS data files present a reliable perspective to evaluate countries’ portfolio positions. As a rule of thumb, the more home-biased are local investors in a country, the less they are likely to benefit from the international diversification gains. Indeed, since the mid-1980s, the investment environment in Turkey had been gradually liberalized. Given this facilitated access to global capital markets, local investors transacting solely within the domestic market should also exploit the presumed gains from international diversification. Thus, I propose a comparative analysis of Turkish investors’ aggregate external positions along with a number of developed and emerging economies to reveal out the extent to which local investors in Turkey overlook (or consider) portfolio investment alternatives abroad compared to their counterparts in other countries. The analysis show that Turkish investors are particularly home-biased compared to other investors in OECD countries. Yet, a simple international mean-variance model suggests that the optimal domestic portfolio share ranges between 10 to 30% for reasonable degrees of risk aversion puzzle.