What Makes Investors Over or Underweight? Explaining International Appetites for Foreign Equities

44 Pages Posted: 7 Oct 2004

See all articles by Carol C. Bertaut

Carol C. Bertaut

Board of Governors of the Federal Reserve System

Linda Kole

Board of Governors of the Federal Reserve System - World Payments and Economic Activity Section

Date Written: September 2004

Abstract

Using data from the IMF Coordinated Portfolio Investment Surveys conducted in 2001, we analyze the determinants of 31 countries' international equity holdings. We show that investors in all countries underweight U.S. equities in their portfolios, many by more than they underweight foreign equities in general. Such behavior is surprising given the common perception of the United States as a desirable investment destination due to its well-developed legal and regulatory environment. Instead we find that investors in some countries are overweight in equities from other countries with which they have close regional or political ties. Such ties, along with distance, trade, issuance of U.S. ADRs or cross-listing on the London Stock exchange, market concentration, and estimated betas, help explain patterns of diversification. However, even when all these variables are included, we find significant fixed effects for most countries, suggesting that a considerable amount of cross-country variation in investment positions and in home bias remains to be explained. Our work confirms previous findings and extends results most completely documented for the United States to other major investor countries. But it also suggests caution should be used when interpreting results derived from studies of one or a few countries.

Keywords: Home bias, international portfolio allocation

JEL Classification: F3, G11, G15

Suggested Citation

Bertaut, Carol C. and Kole, Linda, What Makes Investors Over or Underweight? Explaining International Appetites for Foreign Equities (September 2004). FRB International Finance Discussion Paper No. 819. Available at SSRN: https://ssrn.com/abstract=600587 or http://dx.doi.org/10.2139/ssrn.600587

Carol C. Bertaut (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Linda Kole

Board of Governors of the Federal Reserve System - World Payments and Economic Activity Section ( email )

20th and Constitution Avenue, N.W.
Washington, DC 20551
United States

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