Home Equity Bias

This study is aimed to investigate the factors that are intended to lessen the home equity bias or became a base for foreign diversification. By using the foreign diversification of twenty-one developing countries over a period of ten years and incorporating the effect of nine important variables for exploring their effect on home bias. The results from Random effect panel regression shows a diminishing trend of investors towards home equity biasness and the contributing factors for lessening this bias are local market share in world market capitalization and information available to investors and trade opening.

The Effects Of Restricting Capital Outflows On Investment In An Open Economy

<p class="MsoBodyText2" style="text-align: justify; line-height: normal; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This paper considers the effects of restricting capital outflows on foreign investment in a developing country. It is shown that a developing country may restrict capital outflows if domestic economic conditions are poor, and it may liberalize capital outflows if domestic economic conditions are strong. Restricting capital outflows has large impact if the investment horizon is short. Furthermore, restricting capital outflows may discourage foreign investors from investing in the developing country. This result is consistent with the home equity bias.</span></span></p>

Investor Protection, Equity Returns, and Financial Globalization

We study the effects of investor protection on stock returns and portfolio allocation decisions. In our theoretical model, if investor protection is weak, wealthy investors have an incentive to become controlling shareholders. In equilibrium, the stock price reflects the demand from both controlling shareholders and portfolio investors. Due to the high demand from controlling shareholders, the price of weak corporate governance stocks is not low enough to fully discount the extraction of private benefits. Thus, stocks have lower expected returns when investor protection is weak. This has implications for domestic and foreign investors’ stockholdings. In particular, we show that portfolio investors’ participation in the domestic stock market and home equity bias are positively related to investor protection and provide original evidence in their support.

Effects of underdeveloped equity market on investment

This paper uses a variant of the Allen, Bernardo, and Welch (2000) model in an open market economy to analyze the effects of equity market development on investment. A country’s underdeveloped equity market may discourage investors from investing in the country. Consequently, an underdeveloped equity market may contribute to home equity bias. Asset prices in a less developed equity market tend to be lower. The results suggest that a government may need to facilitate the development of its equity market to attract investment