three factors, we can form a proximate picture of the emerging pattern of global capital flows. these projections are based on the same restrictive set of modelling assumptions. nonetheless, they provide a transparent window on possible emerging patterns. are the forces of financial deepening in emerging capital markets sufficient to outpace the reduction in advanced country portfolio home bias, lessening the bfsp problem? or does portfolio reallocation by advanced economies risk swamping embryonic emerging capital markets exacerbating this problem? chart 13 looks at the ratio of annual average capital flows to g20 emerging markets relative to their market capitalisation over the period 2010 to 2050. it is the analogue of chart 2, using projections of both numerator and denominator. the highest and lowest annual inflows over the projection period are also shown to capture potential annual variation in capital flows. chart 14 plots annual gross capital inflows to emerging markets over the same period. non - g20 market cap is assumed to grow in line with the forecast for total g20 market capitalisation. bis central bankers ’ speeches some notable points include : over the period 2010 to 2050, the average scale of capital inflows, relative to market capitalisation, for the g20 emerging markets is around 8 % per year. that is greater than the peak inflow experienced in the recent past, including in 2010, during which time asset prices rose significantly and protective policy measures were put in place. given the likely variation in these inflows year by year, the picture is even more striking. potential “ peak ” inflows are into double digits for the majority of g20 emerging markets. as context, peak portfolio equity inflows to east asian countries in the three years preceding their 1990s crisis averaged 4 % of market capitalisation. for some individual emerging market countries, these capital inflow patterns are dramatic. for example, over the period 2010 – 2050, average inflows to india and indonesia exceed 10 % of their equity market capitalisation. taken together, these projections do not suggest a dissipation of the bfsp problem. more likely, they suggest it could intensify, perhaps significantly, in the period ahead. if capital markets operated efficiently, these portfolio flows need not cause waves in emerging credit and asset markets. in practice, frictions in the functioning of these markets mean that asset market spillovers seem very likely to persist. in other words, the splashes from the big fish risk

g20 in 2007 was around 0. 78. weighted by market capitalisation, average home bias was 0. 66. so, in weighted terms, g20 countries ’ holdings of foreign equity are around a third of the value they would be in the theoretically optimum market portfolio. this home bias is lower among advanced than emerging market economies. the un - weighted home bias index in 2007 was 0. 63 for advanced countries, while for emerging market g20 economies it was 0. 90. for those emerging economies which maintain capital restrictions, such as india and china, home bias remains almost complete. on average, there has been a decline in equity home bias across g20 countries over time. among advanced g20 economies, the un - weighted home bias index has fallen from 0. 75 in 1995 to 0. 63 in 2007. weighted by market capitalisation, it has fallen from 0. 79 to 0. 61 over the same period. foreign equity holdings have gone from a fifth to a third of their theoretical benchmark. while seemingly modest in index terms, the implied portfolio reallocations amount to very sizable portfolio equity flows. that is because stocks of outstanding equity assets are enormous. for example, a fall of 0. 1 in the weighted home bias index for advanced countries in 2007 relative to 2006 would have equated to a portfolio reallocation to foreign markets of around $ 4. 5 trillion. that is a big fish. to give home bias for a given country is given by : 1 – country ’ s holdings of foreign equity compared to country ’ s total global equity holdings other countries ’ total share of world equity market capitalisation bis central bankers ’ speeches some context, the market capitalisation of all g20 emerging market countries in 2007 was $ 6. 8 trillion. that is a smallish pond. for individual countries, some of the falls in home bias have been fairly dramatic – for example, in germany, france and italy. changes in us patterns of home bias are also very significant in financial terms. the fall of 0. 17 in measured us home bias between 1995 and 2007 corresponds to an annual average portfolio reallocation to the rest of the world of around $ 370 billion ( or 1. 4 % of non - us global gdp ). the pace at which home bias has been reduced is all the more striking because, over the same period, emerging markets have become a larger slice of the global portfolio pie. between 1995 and 2010, the emerging g20 countries more