a note on foreigners trading and price effects across firms abstract we study the investment behavior of foreign investors in association with an equity market liberalization and find a strong link between foreigners trading and local market returns in the period following the liberalization net purchases by foreign investors induced a permanent increase in stock prices suggesting that local firms reduced their cost of equity capital we also find a strong link between a firm s fraction of foreign ownership and the magnitude of the cost reduction foreign investors seem to prefer large and well known firms and these firms realize the largest reduction in capital cost furthermore our analysis suggests that foreigners increase their net holding in firms that have recently performed well analyzing foreigners performance we find very little evidence of informed trading suggesting that risk sharing is the most plausible explanation for the reduction of the cost of equity capital

information acquisition and under diversification if an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests which assets should he learn about the best assets to acquire information about are ones the investor expects to hold but the assets the investor holds depend on the information he observes we build a framework to solve jointly for investment and information choices with general preferences and information cost functions although the optimal research strategies depend on preferences and costs the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio information acquisition can rationalize investing in a diversified fund and a concentrated set of assets an allocation often observed but usually deemed anomalous copyright wiley blackwell

do institutional factors influence cross border portfolio equity flows new evidence from emerging markets abstract we exploit a proprietary database containing foreign trading data from 20 stock exchanges for the 2006 2018 period to expand the existing evidence on cross border equity flows towards emerging markets in particular after briefly assessing the relevance of push and pull factors we study whether explicit and implicit barriers to investment corporate governance standards and market structure features influence cross border equity inflows we find that pull factors are an important determinant of foreign inflows while push factors have a smaller influence more importantly we find that removing explicit barriers to investment and adopting stricter corporate governance practices has a long run positive relation with inflows conditional on push and pull factors removing information barriers also matters but relatively less market structure features have instead little influence on cross border flows towards emerging markets

the drivers of structural change the main goal of this paper is to provide an integrated survey of the literature devoted to identifying the drivers of structural change broadly defined as the process of reallocation of economic activity across the three broad sectors agriculture manufacturing and services using the ggdc 10 sector database this paper first presents the empirical facts associated with structural change in different regions of the world that is europe and the usa asia latin america and africa then reviews four determinants of structural change i changes in income ii changes in relative sectoral prices iii changes in input output linkages and iv changes in comparative advantage s via globalization and trade

central bank transparency and cross border banking abstract we analyze the effect of central bank transparency on cross border bank activities based on a panel gravity model for cross border bank claims for 21 home and 47 destination countries from 1998 to 2010 we find strong empirical evidence that a rise in central bank transparency in the destination country on average increases cross border claims using interaction models we find that the positive effect of central bank transparency on cross border claims is only significant if the central bank is politically independent and operates in a stable economic environment central bank transparency and credibility are thus considered complements by banks investing abroad

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

investment allocation decisions home bias and the mandatory ifrs adoption abstract we examine the familiarity hypothesis of home bias by studying how foreign ownership of swedish firms is affected by the mandatory adoption of ifrs we decompose foreign investors into institutional and non institutional investors foreign investors are further decomposed into eu ifrs adopting countries and non eu residents non ifrs adopting countries we analyse the equity investments of these foreign investor groups in sweden during the period of 2001 2007 we find that after the mandatory adoption of ifrs foreign ownership owners from countries that adopted ifrs and particularly those from the eu increased these effects are particularly strong in small firms foreign institutional investors increased their ownership stake after the mandatory ifrs adoption whereas foreign non institutional investments were not affected significantly by the ifrs adoption in contrast to ownership from non adopting countries ownership from the eu increased in firms with both more and less tangible assets similarly foreign ownership from the eu increased in firms with both concentrated ownership and dispersed ownership after the adoption because sweden has already had strict legal enforcement and a low level of earnings management prior to the adoption our results suggest that increased foreign ownership is due to better abilities to compare firms rather than an improved quality

home sweet home home bias and international diversification among individual investors abstract a striking feature of international portfolio investment is the extent to which equity portfolios are concentrated in the domestic market of the investor we investigate differences in home bias on an individual level by studying portfolios formed as a part of the new defined contribution pension plan in sweden we estimate the likelihood of home bias and use individuals demographic and socioeconomic features as explanatory variables our findings indicate that the likelihood of home bias is caused by both rational and irrational factors moreover we relate home bias to investors desire to hedge against inflation sophistication and overconfidence

home bias in global bond and equity markets the role of real exchange rate volatility abstract this paper focuses on the role of real exchange rate volatility as a driver of portfolio home bias and in particular as an explanation for differences in home bias across financial assets we present a markowitz type portfolio selection model in which real exchange rate volatility induces a bias towards domestic financial assets as well as a stronger home bias for assets with low local currency return volatility we find empirical support in favour of this hypothesis for a broad set of industrialized and emerging market countries not only is real exchange rate volatility an important factor behind bilateral portfolio home bias but we find that a reduction of monthly real exchange rate volatility from its sample mean to zero reduces bond home bias by up to 60 percentage points while it reduces equity home bias by only 20 percentage points

taking gravity online the role of virtual proximity in international finance abstract this paper analyses international patterns of bilateral portfolio equity and debt investment in a gravity model framework we contribute to the literature by exploring the role of virtual proximity measured by bilateral internet hyperlinks between countries as a novel proxy for cross border information flows and cultural proximity more generally our findings show that bilateral portfolio investment is significantly affected by virtual proximity indicating that countries which are more closely connected in terms of web content are more integrated financially the effect is stronger for equity than for debt investment highlighting the larger information sensitivity of equity investments and is largest for investments among advanced economies moreover including virtual proximity in estimations reduces the importance of traditionally used proxies for information asymmetries and cultural proximity

do trade costs in goods market lead to home bias in equities abstract two of the main puzzles in international economics are the consumption and the portfolio home biases we solve for international equity portfolios in a two country two good stochastic equilibrium model with trade costs in goods markets we show that introducing trade costs as suggested by obstfeld and rogoff obstfeld m rogoff k 2000a the six major puzzles in international macroeconomics is there a common cause nber macroeconomics annual 15 is not sufficient to explain these two puzzles simultaneously on the contrary we find that trade costs create a foreign bias in portfolios for reasonable parameter values this result is robust to the addition of non tradable goods for standard calibrations of the preferences

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

home bias and high turnover dynamic portfolio choice with incomplete markets why do investors trade a lot in foreign assets and hold so little of them in their portfolios this paper shows that both observations can arise naturally in the presence of nondiversifiable nontraded consumption risk when each country specializes in production preferences exhibit consumption home bias and asset markets are incomplete using a general equilibrium two country two sector tradable and nontradable model of the world economy with production i show that low diversification occurs because variations in relative prices i increase the riskiness of foreign assets and ii facilitate risk sharing across countries large and volatile capital flows are necessary to take advantage of international risk premia differentials that occur in response to productivity changes in the nontradable sector i characterize the optimal portfolio holdings the evolution of the investment opportunity set the risk premium and the dynamics of capital flows using a new methodology for solving dynamic general equilibrium models with incomplete markets and portfolio choice

endogenous asymmetric information and international equity home bias the effects of portfolio size and information costs equity home bias is one of the major puzzles in international finance this paper investigates the impact of asymmetric information on equity home bias in a rational expectation model where portfolio managers differ in their levels of initial portfolio size and information acquisition is endogenous the model characterizes the information acquisition and investment decisions made by each portfolio manager and the resulting equilibrium we find that portfolio managers with larger portfolio size acquire information about the foreign asset this is consistent with new evidence linking the degree of home bias across portfolio managers to portfolio size

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

global investments and regional development trajectories the missing links abstractglobal investments and regional development trajectories the missing links regional studies regional economic development has been long conceptualized as a non linear interactive and socially embedded process these features were traditionally regarded as spatially mediated and highly localized however unprecedentedly fast technological change coupled with the intensification of global economic integration has spurred the need to place regional development in a truly open and interdependent framework despite substantial progress in the academic literature rethinking regional development in this perspective still presents a number of challenges in terms of concepts empirical evidence and policy approaches following an interdisciplinary assessment of how openness and connectivity proxied by one of the many cross border flows i e global investments interact with regional economic development trajectories this paper presents a picture of the geography of foreign investments from and

portfolio preferences of foreign institutional investors the authors examine the relationship between foreign investment and the attributes of emerging market countries and firms in which investment is made their findings indicate that countries with higher levels of economic development and floating exchange rate regimes tend to have greater ability to obtain foreign capital after controlling for the country s level of economic development they find that firms in countries with stronger shareholder rights and legal framework attract more foreign capital the authors also find that foreign institutions allocate more of their assets to firms with better corporate governance after controlling for other country and firm attributes the main firm level measures of corporate governance are derived from accounting quality variables their results imply that steps can be taken both at the country and the firm level to create an environment conducive to foreign portfolio investment the analysis is based on a unique dataset consisting of equity positions of u s mutual funds in emerging markets

legal harmonization institutional quality and countries external positions a sectoral analysis abstract motivated by the action plan for a european capital markets union cmu this paper analyzes the potential for legal harmonization and convergence in institutional quality to affect capital market integration based on hand collected data on the implementation of eu directives our analysis yields three key insights first legal harmonization promotes portfolio equity holdings second discrepancies in institutional quality matter primarily for cross border debt positions third the relationship between external investments and harmonization varies significantly across sectors the non bank financial corporations which account for a large share of portfolio positions react more to institutional harmonization than do banks and the non financial private sector

equity home bias and corporate disclosure abstract i show that more comprehensive corporate disclosure reduces investors uncertainty about domestic companies payoffs at no cost thereby decreasing investors equity home bias toward a country since investors should base their investment decisions on valid and easily interpretable company information only more comprehensive disclosure will reduce the home bias only if domestic securities law is sufficiently stratified and domestic companies use international accounting standards using panel data for 38 countries from 2003 to 2008 i find that more comprehensive disclosure reduces investors home bias though significantly only for countries that sufficiently enforce their securities law and implement international accounting standards

information immobility and the home bias puzzle many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can but why does global information access not eliminate this asymmetry we model investors endowed with a small home information advantage who choose what information to learn before they invest surprisingly even when home investors can learn what foreigners know they choose not to investors profit more from knowing information others do not know learning amplifies information asymmetry the model matches patterns of local and industry bias foreign investments portfolio outperformance and asset prices finally we propose new avenues for empirical research

trade in goods and trade in tasks an integrating framework abstract we introduce a simple but flexible analytical framework in which both trade in goods and trade in tasks arise we use this framework to provide versions of the gains from trade and the famous four ho theorems heckscher ohlin factor price equalisation stolper samuelson and rybczynski that apply to this environment we extend our framework to accommodate monopolistic competition and two way offshoring and to integrate theoretical results of the early offshoring literature

endogenous acquisition of information and the equity home bias this paper investigates the extent to which differences in information costs can explain the equity home bias puzzle in a model where information costs are higher for the foreign asset than for the home asset i show that if cost functions are convex and the assets have identical return characteristics the expected size of the home bias in terms of differences in expected demands is positive and increasing in expected excess returns and risk but decreasing in risk aversion however a calibration to us data suggests that information costs can explain only a small fraction of the observed home bias

offshoring of routine tasks and de industrialisation threat or opportunity and for whom abstract offshoring or overseas sourcing of routine tasks generates efficiency gains that benefit consumers and workers with skills similar to those whose very jobs are threatened by offshoring essentially the interaction between offshoring footloose capital and agglomeration economies locks the comparative advantage of advanced nations in complex or strategic functions while labour services in routine tasks the coordination of which is easily codified are provided by low wage developing nations through the fibre optic cable in this framework the partial equilibrium view that offshoring is necessarily detrimental to workers in advanced nations is misguided because the implicit counterfactual that keeping the off shored jobs would have no macroeconomic impact on the economy is not warranted in addition inasmuch as routine tasks create few positive feedbacks trade in tasks can be an impediment to income convergence unlike trade in goods in short this paper qualifies the views that offshoring hurts workers in the north and accelerates income convergence between the north and the south

the determinants of international investment and attention allocation using internet search query data abstract this paper explores the joint determination of home bias and attention allocation we overcome the typical challenge associated with evaluating attention allocation theories by using a new internet search query dataset to measure how much information investors decide to process employing an instrumental variables approach we find empirical evidence of a two way causality between home bias and attention our estimates suggest that if all countries were to receive the same level of attention as the u s then the average home bias by u s investors would fall from 85 2 to 57 3

testing for market power using a dynamic oligopoly model abstract we propose a dynamic reformulation of the oligopoly model of bresnahan 1982 and lau 1982 in an error correcting framework this reformulation addresses both statistical problems generated by short run dynamics in the data and incorporates important dynamic factors such as habit formation from the demand side and adjustment costs for the producer we also propose a test for separability of the variables involved in the identification of the market power parameter to illustrate the model the french market for fresh salmon is analysed the results suggest the salmon market to be competitive in the long run but indicate that the largest producer norway has some market power in the short run

direct foreign ownership institutional investors and firm characteristics in this paper we characterize foreign ownership using a dataset of ownership and attributes of swedish rms the analysis reveals that foreigners show a preference for large rms rms paying low dividends and rms with large cash positions on their balance sheets when we further analyze the preference for large rms we nd that market liquidity and presence in international markets measured through export sales or listings on other exchanges seem to characterize foreign holdings better than rm size alone foreigners also tend to underweight rms with a dominant owner importantly we demonstrate that most of the features associated with foreign ownership are driven by the fact that foreign investors typically are mutual funds or other institutional investors hence we identify an institutional investor bias rather than a foreign investor bias finally using ownership data on a country level we conclude that the results are particularly strong among u s investors who comprise the largest institutions among foreign investors 2001 elsevier science s a all rights reserved jel classixcation g1 g15

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed