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Why Don't Asians Invest in Asia? The Determinants of Cross-Border Portfolio Holdings

Asian Economics Papers, Vol. 8

BBVA Working Paper No. 0906

23 Pages Posted: 15 Jul 2009 Last revised: 22 Mar 2010

Alicia García-Herrero

NATIXIS HONG KONG; BBVA RESEARCH; BRUEGEL

Philip D. Wooldridge

Bank for International Settlements (BIS)

Doo Yong Yang

Asian Development Bank Institute

Date Written: April 9, 2009

Abstract

This paper seeks to understand why Asian foreign investment is concentrated in financial markets outside of the region instead of in Asian markets. We analyse empirically the geographical composition of the cross-border portfolio holdings of more than 40 source countries. We compare these benchmark results with those of four subgroups: advanced industrial economies; emerging market economies; European economies; and Asia-Pacific economies. The lack of liquidity in Asian financial markets turns out to be one reason why Asian capital is invested predominantly outside the region, notwithstanding the short distances and large trade flows between Asian economies. Initiatives to improve the liquidity of Asian financial markets, therefore, may be a useful way to stimulate financial integration within the region.

Keywords: cross-border portfolio investment, regional financial integration, gravity model

JEL Classification: F21, F36, G11

Suggested Citation

García-Herrero, Alicia and Wooldridge, Philip D. and Yang, Doo Yong, Why Don't Asians Invest in Asia? The Determinants of Cross-Border Portfolio Holdings (April 9, 2009). Asian Economics Papers, Vol. 8; BBVA Working Paper No. 0906. Available at SSRN: https://ssrn.com/abstract=1434276

Alicia Garcia-Herrero (Contact Author)

NATIXIS HONG KONG ( email )

France

BBVA RESEARCH ( email )

Argentina

BRUEGEL ( email )

Rue de la Charité 33
B-1210 Brussels Belgium
Belgium

Philip D. Wooldridge

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Doo Yong Yang

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F 3-2-5
Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

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