International Equity Holdings Research Articles

A Measure of Pure Home Bias*

The literature on international equity holdings distinguishes between home bias (overweighting of home stocks) and foreign bias (relative underweighting for more “distant” countries). The two biases can be integrated into one distance-based model. We define pure home bias as the excess of home bias relative to this model, and find pure home bias only in emerging markets. Countries with high tax rates and low credit standing have higher pure home bias, and more development comes with lower distance aversion. Methodologically, the choice of portfolio bias measure matters. We find the best measure to be a covariance-based measure relative to the world average.

Foreign bias in Australia's international equity holdings

The paper uses various approaches: capital asset pricing, mean-variance, global minimum-variance, Bayes-Stein, Bayesian and multi-prior to develop foreign equity bias measures for Australia’s international equity holdings in 41 countries, over the period 2001 to 2012. Bayesian models allow for various degrees of mis-trust in the ICAPM model. Multi-Prior restricts the expected return for each asset to lie within specified confidence interval around its estimated value. Mean-Variance computes optimal weights by sample estimates of mean and covariance matrix of sample return. Bayes-Stein shrinks each asset’s historical mean return toward the return of the minimum variance portfolio and improves precision associated with estimating the expected return of each asset. The plausible sources of foreign equity bias are trade, GDP per capita, real GDP growth rate, exchange rate volatility, tax credit, stock market development, familiarity and institution variables. The paper finds that economic cost of the observed foreign bias is low. The paper analyses correlation effect on the foreign bias and finds that economic loss decreases with an increase in correlation.

A Pure Measure of Home Bias

The literature on international equity holdings distinguishes between home bias (overweighting of home stocks) and foreign bias (relative underweighting for more distant countries). The two biases can be integrated into one distance-based model. We define pure home bias as the excess of home bias relative to this model, and find pure home bias only in emerging markets. Countries with high tax rates and low credit-standing have higher pure home bias, and more development comes with lower distance-aversion. Methodologically, the choice of portfolio bias measure matters. We find the best measure to be a covariance-based measure relative to the world average.

Currency Hedging in the Emerging Markets: All Pain, No Gain

Investors in foreign equities are exposed to potential risks from both the movement of security prices and currency exchange rates. Over the past two years, the U.S. dollar has strengthened significantly against most developed and emerging-market currencies, resulting in material performance headwinds for U.S. dollar-based investors. This, in turn, has led to a growing interest in hedging the effects of currency movements on developed international equity holdings. As a consequence, many investors also wonder whether they should apply a similar program to their emerging- market assets. While this is a natural question, it ignores some of the major differences between implementing a hedging program for developed market currencies versus doing so for emerging-market currencies. We discuss these implementation issues and point out the historical relationship between stock price movements and currency returns in emerging markets. The authors find that for many emerging-market countries, these implementation issues make it operationally impossible to hedge many of these currency exposures; for those that are possible to hedge, the current market environment makes it very expensive Furthermore, if one looks at the theoretical impact from hedging currency in emerging markets, it appears to be a minor one over the long term and is equivalent to making episodic market calls in the short term.

Channels of international risk-sharing: capital gains versus income flows

Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative) when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening.

Portfolio performance and the Euro: Prospects for new potential EMU members

Entering the EMU removes currency risk for assets originating in the Euro area while diversification opportunities are likely reduced. Taking the perspective of an investor in one of the 12 countries that joined the EU in 2004–2007, we contrast actual optimal composition of international equity holdings against two artificial scenarios: costless hedging against exchange rate risk and presuming the local market to be part of the EMU. State specific optimal portfolios are determined from realized covariances for the period 2000–2006. Optimized risk is found smaller under currency unification and implied Sharp ratios signal significant benefits of EMU participation.

Channels of International Risk-Sharing: Capital Gains versus Income Flows

Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative) when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening.

Short-term Forecasts of Euro Area GDP Growth

Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative) when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening. JEL Classification: E52, C33, C53

International investment patterns: Evidence using a new dataset

This paper examines the bilateral, source and host factors driving portfolio equity investment across a set of countries using International Monetary Fund's new dataset on international equity holdings at the end of 1997, 2001 and 2002. The paper finds that the bilateral equity investment is strongly correlated with the underlying patterns of trade in goods and services. The information asymmetries and cultural-institutional proximity are important for bilateral equity investment. The size of domestic stock market is the key correlate of aggregate foreign portfolio equity asset and liability holdings. The scale of aggregate foreign equity asset holdings is larger for countries having high income per capita.

The International Equity Holdings of Euro Area Investors

We provide a systematic analysis of bilateral, source and host factors driving portfolio equity investment by countries, using newly-released data on international equity holdings at the end of 2001. We find that bilateral equity holdings are strongly linked to bilateral trade in goods and services and are also associated with proxies for informational proximity. We further document that there exists a significant euro-area bias, with countries investing in other countries over and above the amount predicted by underlying fundamentals.

Reevaluating the Role of Trade Agreements: Do International Equity Holdings Make the Wto Obsolete?

International ownership alters the role of multilateral trade institutions by redefining pecuniary externalities among countries. Regardless of the underlying cause – whether foreign direct investment, international portfolio diversification, cross-country mergers, or multinational firms – international ownership can mitigate incentives that lead large countries to set inefficiently high tariffs. At the same time, however, foreign ownership introduces the potential for expropriation by investment-host countries, which can extract rent from foreign owners by manipulating local prices. The basic principle of reciprocity continues to serve as an important guide to efficiency, though its application must account for the pattern of international ownership in addition to traditional measures of market access.

International Investment Patterns

We provide a systematic analysis of bilateral, source and host factors driving portfolio equity investment across countries, using newly released data on international equity holdings at the end of 2001. We develop a model that links bilateral equity holdings to bilateral trade in goods and services and find that the data strongly support such a correlation. Larger bilateral positions are also associated with proxies for informational proximity. We further document that the scale of aggregate foreign equity asset and liability holdings is larger for richer countries and countries with more developed stock markets.

Returns from active management in international equity markets: Evidence from a panel of UK pension funds

This paper proposes new performance decomposition measures that allow one to analyse the sources of returns on the international equity holdings of a large cross-section of UK pension funds. The results suggest that the pension funds earned negative returns both from international market timing and from selecting stocks within individual foreign regions. The average fund underperformed a passive global equity benchmark by 70 basis points per annum. This is substantially greater than UK pension funds' underperformance in their domestic equity market. The implications of these findings for theories of informational asymmetries in international stock markets are discussed.

International Asset Allocation with Time‐Varying Investment Opportunities

This paper analyses the international equity holdings of a large panel of UK pension funds. We find considerable evidence of market timing activity, as illustrated by the funds' decision to scale back their investments in the US stock market during the 1990s. To explain this we model portfolio weight dynamics as a function of time-varying conditional moments. We find that a substantial part of the evolution in portfolio weights is explained by time-varying conditional expected returns, volatilities and covariances with domestic equity returns. Consequently, controlling for the effect of state variables that track time-variations in investment opportunities significantly affects estimates of returns from international market timing. Our estimates suggest that the portfolio movements that were orthogonal to such state variables accounted for a net loss of 0.2 per cent per annum for the average fund.

What Makes Investors Over or Underweight? Explaining International Appetites for Foreign Equities

Using data from the IMF Coordinated Portfolio Investment Surveys conducted in 2001, we analyze the determinants of 31 countries' international equity holdings. We show that investors in all countries underweight U.S. equities in their portfolios, many by more than they underweight foreign equities in general. Such behavior is surprising given the common perception of the United States as a desirable investment destination due to its well-developed legal and regulatory environment. Instead we find that investors in some countries are overweight in equities from other countries with which they have close regional or political ties. Such ties, along with distance, trade, issuance of U.S. ADRs or cross-listing on the London Stock exchange, market concentration, and estimated betas, help explain patterns of diversification. However, even when all these variables are included, we find significant fixed effects for most countries, suggesting that a considerable amount of cross-country variation in investment positions and in home bias remains to be explained. Our work confirms previous findings and extends results most completely documented for the United States to other major investor countries. But it also suggests caution should be used when interpreting results derived from studies of one or a few countries.

What Makes Investors Over or Underweight? Explaining International Appetites for Foreign Equities

Using data from the IMF Coordinated Portfolio Investment Surveys conducted in 2001, we analyze the determinants of 31 countries' international equity holdings. We show that investors in all countries underweight U.S. equities in their portfolios, many by more than they underweight foreign equities in general. Such behavior is surprising given the common perception of the United States as a desirable investment destination due to its well-developed legal and regulatory environment. Instead we find that investors in some countries are overweight in equities from other countries with which they have close regional or political ties. Such ties, along with distance, trade, issuance of U.S. ADRs or cross-listing on the London Stock exchange, market concentration, and estimated betas, help explain patterns of diversification. However, even when all these variables are included, we find significant fixed effects for most countries, suggesting that a considerable amount of cross-country variation in investment positions and in home bias remains to be explained. Our work confirms previous findings and extends results most completely documented for the United States to other major investor countries. But it also suggests caution should be used when interpreting results derived from studies of one or a few countries.

International Investment Patterns

We provide a systematic analysis of bilateral, source and host factors driving portfolio equity investment across countries, using newly released data on international equity holdings at the end of 2001. We develop a model that links bilateral equity holdings to bilateral trade in goods and services and find that the data strongly support such a correlation. Larger bilateral positions are also associated with proxies for informational proximity. We further document that the scale of aggregate foreign equity asset and liability holdings is larger for richer countries and countries with more developed stock markets.

International Investment Patterns

The paper provides a systematic analysis of bilateral, source and host factors driving portfolio equity investment across countries, using newly-released data on international equity holdings at the end of 2001. It develops a model that links bilateral equity holdings to bilateral trade in goods and services and finds that the data strongly support such a correlation. Larger bilateral positions are also associated with proxies for informational proximity. It further documents that the scale of aggregate foreign equity asset and liability holdings is larger for richer countries and countries with more developed stock markets.

International Investment Performance: Evidence from Institutional Investors’ Foreign Equity Holdings

This paper analyzes the international equity holdings of a large panel of UK pension funds. We find considerable evidence of market timing activity, as illustrated by the funds’ decision to scale back their investments in the US stock market during the 1990s. To explain this we jointly model time-varying conditional moments and portfolio weight dynamics. Past returns do not adequately explain the funds’ international portfolio flows and only matter for the short run. Instead we find that a substantial part of the evolution in portfolio weights is explained by time-varying conditional expected returns, volatilities and covariances with domestic equity returns. However, once we control for publicly known state variables, there is no evidence of extra-market timing skills and most funds appear to have earned small but negative returns from international market timing.