Home Bias and Stock Market Development: The Polish Experience
36 Pages Posted: 29 Mar 2006
Date Written: February 2006
Abstract
Pension reform has become a major policy issue for both developed and developing countries in recent years. In developing countries the impact of these reforms on the development of their financial markets is critical. However, the initial expectations that pension reforms in developing countries would bring broad benefits and result in faster market development have not materialized. A particular problem has been that governments often impose restrictions on the freedom of pension funds' investment decisions. In particular, they have a tendency to enforce home bias in investment behaviour (e.g., as is the case in Russia and Poland). This paper provides a non-technical introduction to home bias and its role in stock market development, and uses the Polish experience as a case study. It discusses the main arguments for portfolio diversification, the primary side effects that emerge from locking funds into underdeveloped equity markets, and highlights the problems the Polish pension funds face as a result of the "enforced" home bias policy of the Polish authorities. The findings support the view that enforced home bias has a negative impact on the local stock market development, on the performance of pension reform.
Keywords: pension reforms, home bias, stock market development, emerging markets
JEL Classification: G23, G28, G11
Suggested Citation: Suggested Citation
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