The Coming Wave: Where Do Emerging Market Investors Put Their Money?

72 Pages Posted: 26 Oct 2015

See all articles by George Andrew Karolyi

George Andrew Karolyi

Cornell University - Samuel Curtis Johnson Graduate School of Management

David T. Ng

Johnson College of Business

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

Multiple version iconThere are 4 versions of this paper

Date Written: October 2015

Abstract

We examine how emerging market (EM) investors allocate their stock portfolios internationally. Using both country-level and institution-level data, we find that the coming wave of EM investors systematically over- and under-weight their holdings in some target countries. These abnormal foreign allocation biases of EM investors offer robust support of the information endowment hypothesis of van Nieuwerburgh and Veldkamp (2009). Specifically, past capital and trade flows from a foreign country to the home country create an information endowment (or advantage) that lead home country investments to be overweight that foreign country. At the institutional level, information advantage proxies based on relationships between EM institutional investors and the headquarters of their parent companies have strong explanatory power for international portfolio allocations. The results remain robust after controlling for other factors like geographic and other measures of economic proximity, economic and capital market development, market integration, market returns and correlation, and corporate governance. The information advantage effect is stronger for EM investors for which external portfolios exhibit a higher degree of concentration.

Suggested Citation

Karolyi, George Andrew and Ng, David T. and Prasad, Eswar S., The Coming Wave: Where Do Emerging Market Investors Put Their Money? (October 2015). NBER Working Paper No. w21661. Available at SSRN: https://ssrn.com/abstract=2679699

George Andrew Karolyi (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

David T. Ng

Johnson College of Business ( email )

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Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management ( email )

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HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

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Brookings Institution ( email )

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NBER ( email )

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IZA Institute of Labor Economics

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Germany

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