What drives international equity and bond holdings? An empirical study

Abstract

In this article, we explore tentatively and formally the differences between bond and equity home and foreign bias based on a large data set including developed and emerging markets for the period 2001 to 2010. We show that, unlike for equities, the international demand for bonds is mainly supply-side driven: bond home bias increases with a growth in public debt, while the underinvestment bias towards a foreign country's bonds decreases if this country issues more (sovereign) debt. This explains the absence for a negative time trend in bond home bias while equity home bias has decreased over time, and similarly a decrease in foreign bond bias, which is not observed for equities. Besides variables being significantly more, less or incompatibly important for bond versus equity investment bias, we also determine variables to be exclusively relevant for bonds, like sovereign credit ratings and bank credit supply.