Home bias in global bond and equity markets: The role of real exchange rate volatility

Abstract

4Non-technical summary 5

The Political Determinants of Government Bond Holdings

“…Furthermore, indicators of the quality of government institutions and corporate governance matter more for equity portfolios than for bond portfolios, while the level of financial development is more important for attracting bond investments. Fidora et al (2007) focus on the role of real exchange rate volatility in explaining home bias in global bond and equity markets. In their theoretical model, real exchange rate volatility increases home bias relatively more for assets with a relatively low level of local currency return volatility.…”

“…Several interesting strands of the literature have investigated the determinants of bond holdings in general (Burger and Warnock, 2003;Lane, 2005;Fidora et al, 2007;Ferreira and Miguel, 2011;Vanpee and De Moor, 2012;Burger et al, 2014), as well as the sovereign bond holdings of banks (Angeloni and Wolff, 2012;Battistini et al, 2013;De Bruyckere et al, 2013;Buch et al, 2013;Gennaioli et al, 2014;Acharya and Steffen, 2015). The literature here focuses on macroeconomic fundamentals and financial market variables.…”

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

“…However, unlike the previous studies, this paper also highlights the role of regulatory quality in determining home bias in emerging Asia. In order to evaluate the equity home bias in emerging Asia, we employ a measure that is commonly used in the literature (Baele et al, 2007;Bekaert andWang (2009), Chan et al, 2005;Fidora et al, 2007;Jochem and Volz, 2011;and Sørensen et al, 2007). That is, the deviation of actual holdings of domestic equity from the optimal share of domestic equity in the international portfolio.…”

“…This could mean that risk-averse domestic investors tend to overweigh domestic stocks in their portfolio holdings whenever the real foreign exchange rate volatility between domestic and regional currency rises, which cause equity home bias against regional stocks to increase. Fidora et al (2007) and Borensztein and Loungani (2011) also argued that greater real foreign exchange rate volatility increases equity home because it increases the risks for holding foreign securities from home investors' perspective. ∆= first difference; ∆HB1 = home bias using market capitalization ratios; ∆HB2 = home bias using mean-variance approach.…”

Bilateral Home Bias: New Perspective, New Findings

“…Equation 3 redefines the formula for computing home bias in such cases, maintaining therefore the scale of the resulting home bias. In their paper linking home bias to exchange rate volatility, Fidora et al (2007) make the same choice when computing bilateral home bias.…”