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Suboptimal international equity portfolio diversification and stock market development

Author

Listed:
  • Frank O. Kwabi

    (De Montfort University)

  • Chandra Thapa

    (University of Strathclyde)

  • Krishna Paudyal

    (University of Strathclyde)

  • Suman Neupane

    (The University of Queensland)

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.

Suggested Citation

  • Frank O. Kwabi & Chandra Thapa & Krishna Paudyal & Suman Neupane, 2020. "Suboptimal international equity portfolio diversification and stock market development," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 389-412, January.
    • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:1:d:10.1007_s11156-019-00793-9
    DOI: 10.1007/s11156-019-00793-9
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    More about this item

    Keywords

    International equity portfolio diversification; Stock market development; Equity home bias; Equity foreign bias; Shock based identification strategy;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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