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What drives international equity and bond holdings? An empirical study

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  • Lieven De Moor
  • Rosanne Vanp�e

Abstract

In this article, we explore tentatively and formally the differences between bond and equity home and foreign bias based on a large data set including developed and emerging markets for the period 2001 to 2010. We show that, unlike for equities, the international demand for bonds is mainly supply-side driven: bond home bias increases with a growth in public debt, while the underinvestment bias towards a foreign country's bonds decreases if this country issues more (sovereign) debt. This explains the absence for a negative time trend in bond home bias while equity home bias has decreased over time, and similarly a decrease in foreign bond bias, which is not observed for equities. Besides variables being significantly more, less or incompatibly important for bond versus equity investment bias, we also determine variables to be exclusively relevant for bonds, like sovereign credit ratings and bank credit supply.

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  • Lieven De Moor & Rosanne Vanp�e, 2013. "What drives international equity and bond holdings? An empirical study," Applied Financial Economics, Taylor & Francis Journals, vol. 23(13), pages 1067-1082, July.
    • Handle: RePEc:taf:apfiec:v:23:y:2013:i:13:p:1067-1082
    DOI: 10.1080/09603107.2013.795273
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    1. John D. Burger & Francis E. Warnock, 2003. "Diversification, original sin, and international bond portfolios," International Finance Discussion Papers 755, Board of Governors of the Federal Reserve System (U.S.).
    2. Robert McCauley & Eli Remolona, 2000. "Size and liquidity of government bond markets," BIS Quarterly Review, Bank for International Settlements, November.
    3. Bank for International Settlements, 2006. "Asian bond markets: issues and prospects," BIS Papers, Bank for International Settlements, number 30, October –.
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    Cited by:

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    2. Hallwood, Paul & MacDonald, Ronald, 2014. "Picking the Right Budget Constraint for Scotland," SIRE Discussion Papers 2015-27, Scottish Institute for Research in Economics (SIRE).
    3. Mikhail Stolbov, 2017. "Assessing systemic risk and its determinants for advanced and major emerging economies: the case of ΔCoVaR," International Economics and Economic Policy, Springer, vol. 14(1), pages 119-152, January.
    4. Liu Kerry, 2023. "The Effects of Foreign Participation on Chinese Government Bond Yields," Folia Oeconomica Stetinensia, Sciendo, vol. 23(2), pages 222-240, December.
    5. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2014. "The role of education in equity portfolios during the recent financial crisis," SIRE Discussion Papers 2015-26, Scottish Institute for Research in Economics (SIRE).
    6. Martijn A. Boermans & Robert Vermeulen, 2020. "International investment positions revisited: Investor heterogeneity and individual security characteristics," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 466-496, May.
    7. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2015. "Education and the local equity bias around the world," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-76, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2014. "The role of education in equity portfolios during the recent financial crisis," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-26, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Boermans, Martijn A. & Vermeulen, Robert, 2016. "Newton meets Van Leeuwenhoek: Identifying international investors’ common currency preferences," Finance Research Letters, Elsevier, vol. 17(C), pages 62-65.
    10. Bhatta, Bibek & Marshall, Andrew & Thapa, Chandra, 2017. "Cost of sovereign debt and foreign bias in bond allocations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 75-91.
    11. Elina Pradkhan, 2016. "Impact of culture and patriotism on home bias in bond portfolios," Review of Managerial Science, Springer, vol. 10(2), pages 265-301, March.

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