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International portfolio frictions

Author

Listed:
  • Wenxin Du
  • Alessandro Fontana
  • Petr Jakubik
  • Ralph S J Koijen
  • Hyun Song Shin

Abstract

We study patterns and implications of global asset allocations of European insurers and banks using newly available supervisory data. We show that the total assets of insurance companies and pension funds (ICPF) far exceed the amount of government bonds outstanding in Europe, and that countries with a large ICPF sector tend to have a large corporate bond market. Despite high levels of international investments, the characteristics of domestic financial markets still loom large in insurers’ and banks’ portfolio allocation, with two newly documented international portfolio frictions playing a prominent role. First, when investing abroad, insurers and banks do not offset attributes of the domestic markets (such as the composition of fixed-income markets, interest rates, and sovereign credit risk), which we label “domestic projection bias.” Second, subsidiaries of multinational groups act like local entities, which we label the “going native bias.” We propose a theoretical framework to explain our empirical findings and discuss the broader policy implications for European capital market deepening and integration, monetary policy transmission and financial stability, and a multi-sectoral approach to regulatory design.

Suggested Citation

  • Wenxin Du & Alessandro Fontana & Petr Jakubik & Ralph S J Koijen & Hyun Song Shin, 2023. "International portfolio frictions," BIS Working Papers 1137, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:1137
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    References listed on IDEAS

    as
    1. Robin Greenwood & Annette Vissing-Jorgensen, 2018. "The Impact of Pensions and Insurance on Global Yield Curves," Harvard Business School Working Papers 18-109, Harvard Business School, revised Dec 2018.
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    Cited by:

    1. Tobias J. Moskowitz & Chase P. Ross & Sharon Y. Ross & Kaushik Vasudevan, 2024. "Quantities and Covered-Interest Parity," Finance and Economics Discussion Series 2024-061, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Banks; insurance companies; pension funds; portfolio choice; fixed income; home bias;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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