Do Regulatory Similarities Increase International Portfolio Holdings?
IUI Working Paper No. 612
49 Pages Posted: 10 Mar 2004 Last revised: 25 Jan 2008
Date Written: December 12, 2004
By combining new data on bilateral asset holdings with data on securities regulation in an empirical gravity model, it is found that bilateral differences in securities regulation lead to decreased portfolio holdings. Hence, regulatory harmonization can foster financial integration. The results are especially strong for equity holdings. It is verified that the results do not just reflect general economic, institutional, and cultural differences. Additional analysis of causality shows the exogenous component of asset holdings to be associated with larger differences in securities regulation. This might suggest that regulatory differences are used to protect domestic capital markets from outside competition.
Keywords: Cross-border portfolio investments, gravity model, harmonization, home bias, integration, securities regulation
JEL Classification: F21, F36, G15, G18, K22
Suggested Citation: Suggested Citation