Equity home bias, financial integration, and regulatory reforms: implications for emerging Asia

Park, Cyn‐Young; Mercado, Rogelio

doi:10.4337/9781783477944.00021

Cited by 4 publications

(3 citation statements)

References 27 publications

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“…The existence of a positive bias is ubiquitous in finance-it can be found in virtually any category of investors and on any type of financial instruments-and we can thus refer our reader to a broad literature which encompasses but is certainly not confined to government bonds. A subjective list of contributions could include Lewis (1999), Chan, Covrig, and Ng (2005), Fidora, Fratzscher, and Thirmann (2006), Chen and Yuan (2011), Levy and Levy (2014), Park and Mercado (2014). 8 As to how to detect the bias, the basic idea is to compare actual banks' holdings with a neutral portfolio allocation (Brealey, Cooper, & Kaplanis, 1999;Chan et al, 2005;Chen & Yuan, 2011;Kaplanis, 1994 andVanpée &De Moor, 2012).…”

Section: The Literaturementioning

confidence: 99%

Banks' holdings of and trading in government bonds

Manna

Nobili

2021

Int. J Fin Econ

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In this paper we examine the holdings of government securities by domestic banks along those of the foreign banks/non-banks/official sector as well as the domestic central bank and domestic non-banks, using data for 21 advanced economies from 2004Q1 to 2016Q2. The research offers four main insights.Firstly, banks are reluctant to undertake large changes in their holdings of domestic bonds but do accept frequent changes of more intermediate size. Secondly, the foreign official sector emerges as the clearest example of contrarian investor, which buys when prices fall and sells when prices rise. Thirdly, the yields of 10-year benchmark sovereign bonds tend to be lower the larger the holdings by domestic and foreign banks are. Finally, we find in all countries of the sample a positive home bias in banks' sovereign holdings while foreign banks hold less than predicted by a neutral portfolio measure. These results suggest that banks regard domestic government bonds as a special asset class (hence the positive bias and the avoidance of large changes in inventories) which they manage in a flexible manner (hence the frequent intermediate changes and the lack of systematic timing of transactions) probably to meet requests from their customers. All in all, this behavior by domestic banks provides a positive contribution to the liquidity of the market as a whole.

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Section: The Literaturementioning

confidence: 99%

Banks' holdings of and trading in government bonds

Manna

Nobili

2021

Int. J Fin Econ

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“…Transaction and information costs are largely viewed as important determinants of cross-border asset investments (C.-Y. Park & Mercado, 2014;Thapa & Poshakwale, 2010). Portfolio flows are generally transacted through intermediaries such as asset management firms and mutual funds (International Monetary Fund, 2014b), which involves fee and other costs.…”

Section: Adjustment Cost and Financial Integrationmentioning

confidence: 99%

“…High transaction costs such as from high brokerage fee, capital flow restriction, market thinness, and information barriers to enter foreign markets could discourage people from investing in foreign assets, whereas lower transaction costs could attract more foreign investments (see for example Mihaljek, Scatigna, and Villar (2002), C.-Y. Park and Mercado (2014), and Thapa and Poshakwale (2010)). Lower cost in foreign asset trading is also considered as related to higher financial development (World Bank, 2012).…”

Section: Adjustment Cost and Financial Integrationmentioning

confidence: 99%

Financial and trade integrations on international business cycle under market imperfection and heterogeneous agents

Ratanavararak

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This thesis studies the effect of financial integration (FI) together with trade integration (TI) on international business cycles and different types of market participants in emerging markets under the presence of financial frictions and imperfect access to finance. The study adopted dynamic stochastic general equilibrium (DSGE) framework and developed three international real business cycle (RBC) models to examine FI from various aspects. The simulation results show that the effect of FI on macroeconomic volatility and business cycle synchronization is mixed likely depending on TI, types of financial flow, severity of market frictions, and financial accessibility. Consumption smoothing benefit and welfare gain from higher FI are small or absent when market imperfection exists. People with more financial restrictions and no unconstrained domestic markets to rely on tend to be more negatively affected by increasing FI. TI generally lowers output and consumption fluctuation, increases business cycle synchronization, and slightly enhances welfare. Some evidences suggest that the impact of FI is weakened under higher trade possibly because FI and TI affect business cycles in opposite directions and their impacts might offset each other. Overall, there is a trade-off among diverse impacts of FI and greater FI is not entirely beneficial. Medium amount of FI combined with high trade tends to yield more desirable outcomes. The implication is that integrated policies are preferable. FI should be considered together with enhancing TI, reducing asymmetric frictions, improving unequal financial access, and advancing financial development. Deepening integration in both markets may be more favorable to business cycles than focusing at only FI. Everyone should be able to access and utilize saving, investment and borrowing opportunities. Moreover, a sound domestic financial market is an important support when FI is imperfect.

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