Sub-optimal international equity portfolio diversification and stock market development

Date

2019-02-07

Advisors

Journal Title

Journal ISSN

ISSN

0924-865X

Volume Title

Publisher

Springer

Type

Article

Peer reviewed

Yes

Abstract

This paper examines whether the widely reported phenomena of home and foreign biases (i.e. suboptimal international equity portfolio diversification) hold any ramifications for the development of stock markets. The results, analysed using macro- and micro-level data, support the view that stock markets that are characterised by a higher degree of home bias are associated with lower levels of development. On the other hand, markets where foreign investors show a higher degree of allocation preference, relative to the prescribed benchmark (foreign bias), are found to be more developed. The results, which are robust to the use of shock based identification strategy, indicate that policy measures that promote optimal international equity portfolio diversification could be crucial in developing the depth and breadth of domestic stock markets.

Description

Keywords

International equity portfolio diversification, Stock market development, Equity home bias, Equity foreign bias, Shock based identification strategy

Citation

Kwabi, F., Thapa, C., Paudyal, K., Neupane, S. (2019) Sub-optimal international equity portfolio diversification and stock market development, Review of Quantitative Finance and Accounting, pp.1-36.

Rights

Research Institute

Finance and Banking Research Group (FiBRe)