In the thought-experiment, this shift in the balance of global activity has important implications for the balance of global capital flows. (a)  The evolution of home bias  With mixed success, theoretical studies have sought to explain cross-country patterns of home bias (Lewis (1999) and Karolyi and Stulz (2003)). Perhaps the most cogent explanations are grounded either in legal restrictions (including capital controls and lack of property rights) and information asymmetries between home and host countries (Gehrig (1993)). Globalisation is likely to have eroded both of these market frictions somewhat over the past decade, in particular among emerging markets. That is consistent with the evidence in Table 1. Predicting the future course of these (legal and information) factors is far from easy. But one plausible instrument for financial diversification is economic development. Cross-country evidence suggests so. Chart 8 plots a cross-section of measured equity home bias in 58 countries against levels of GDP per capita in those countries in 2005. The correlation is strong and significant: GDP per capita accounts for almost 60% of the cross-sectional variation in home bias. As a ready-reckoner, every $ per capita rise in GDP is associated with a fall in home bias of around 0.1.4  3  For example, O’Neill (2011). 4  This cross-sectional relationship was also used to counter-factually predict time-series patterns of home bias in a number of G20 countries. GDP per capita was a reasonable predictor of historical movements in home bias, in particular among advanced economies.

This trend will benefit from the Bloomberg AIBIM Bursa Malaysia Sovereign Shariah Index (BMSSI) developed by the Association of Islamic Banking Institutions Malaysia (AIBIM), Bursa Malaysia and Bloomberg that is also being launched today as part of the enhancement in the Islamic finance platform. The launch of this ringgit sukuk index marks another significant milestone in the Malaysian Islamic financial environment as it measures the performance of ringgit denominated Shariah compliant government securities in addition to the benchmarking purposes. This development has been part of the continuous support by AIBIM and Bursa Malaysia to further strengthen Malaysia’s position as a leading sukuk market in the world. The collaboration between AIBIM, Bursa Malaysia and Bloomberg is also expected to see a ringgit corporate sukuk index in the offing. Moving forward, efforts are underway between Bank Negara Malaysia and Bloomberg to broaden this initiative to develop a foreign currency  BIS central bankers’ speeches  1  sukuk index. The liberalization of our financial markets is expected to attract more such foreign currency sukuk issuance by sovereign entities, multilateral institutions and multinational corporations. In further strengthening the infrastructure for the sukuk market, the Malaysian Electronic Clearing Corporation or MyClear, a wholly-owned subsidiary of Bank Negara Malaysia that operates the country’s real time gross settlement system and securities depository system, is also undertaking an initiative to promote cross-border financial transaction that is efficient, reliable and secured.