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

HKIMR Working Paper No.04/2016

64 Pages Posted: 17 Mar 2016  

George Andrew Karolyi

Cornell University - Johnson Graduate School of Management

David T. Ng

Cornell University

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: March 14, 2016

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- or 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.

Keywords: Global portfolio allocation, portfolio equity investment, institutional investors, emerging market economies

JEL Classification: G11, G15, F21

Suggested Citation

Karolyi, George Andrew and Ng, David T. and Prasad, Eswar S., The Coming Wave: Where Do Emerging Market Investors Put Their Money? (March 14, 2016). HKIMR Working Paper No.04/2016. Available at SSRN: https://ssrn.com/abstract=2747768

George Andrew Karolyi

Cornell University - Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

David T. Ng (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Eswar S. Prasad

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

440 Warren Hall
Ithaca, NY 14853
United States

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

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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