What Drives the Country Allocation of International Portfolio Investments? Universally Available Versus Trade Related Information

29 Pages Posted: 9 May 2004

See all articles by Mohammed Aba Al-Khail

Mohammed Aba Al-Khail

Swedish School of Economics and Business Administration

Tom Berglund

Hanken School of Economics - Department of Economics

Date Written: January 12, 2004

Abstract

This paper analyses the impact of information on international portfolio investments. We decompose information into two categories: information that is observable by investors from all countries (homogeneous), and information that differs in contents between countries (heterogeneous information).

In the homogeneous information set we include general characteristics such as the size of the economy and its financial market, and readily available indicators that categorize the prevailing legal environment and the corporate governance structure of firms in the country. We also include information on how intensively information intermediaries tend to monitor firms in that country.

Finding proxies for the flow of heterogeneous information is more challenging. Following previous studies we use the geographic distance that should be inversely related to unintentional transmission of pieces of information that may turn out to be significant, and also a variable that proxies the commitment of informational resources connected to trade in goods between the countries.

Using comprehensive data on the aggregate country allocation of portfolio investments, we find that the measures of the size of the financial market by far dominates all other variables in the homogeneous information set. However, we also show that what we regard as a proxy for heterogeneous information explains a substantial incremental part of how investors allocate their portfolio investment across foreign markets. These results are robust to alternative samples, and the choice of the reference world portfolio.

JEL Classification: G11, G15

Suggested Citation

Aba Al-Khail, Mohammed and Berglund, Tom Patrik, What Drives the Country Allocation of International Portfolio Investments? Universally Available Versus Trade Related Information (January 12, 2004). Available at SSRN: https://ssrn.com/abstract=495543 or http://dx.doi.org/10.2139/ssrn.495543

Mohammed Aba Al-Khail

Swedish School of Economics and Business Administration ( email )

Department of Finance & Statistics
FI-00101 Helsinki
Finland

Tom Patrik Berglund (Contact Author)

Hanken School of Economics - Department of Economics ( email )

PO Box 479
FI-00101 Helsinki
Finland
+358-9-43133 345 (Phone)
+358-9-43133 382 (Fax)