Working Paper: CEPR ID: DP4417
Authors: Jonas Vlachos
Abstract: By combining new data on bilateral asset holdings with data on securities regulation in an empirical gravity model, it is found that bilateral differences in securities regulation lead to decreased portfolio holdings. Hence, regulatory harmonization can foster financial integration. The results are especially strong for equity holdings. It is verified that the results do not just reflect general economic, institutional, and cultural differences. Additional analysis of causality shows the exogenous component of asset holdings to be associated with larger differences in securities regulation. This might suggest that regulatory differences are used to protect domestic capital markets from outside competition.
Keywords: Cross-border portfolio investments; Gravity model; Harmonization; Home bias; Integration; Securities
JEL Codes: F21; F36; G15; G18; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Differences in securities regulation (G18) | Decreased portfolio holdings (G11) |
| Regulatory harmonization (L51) | Increased bilateral asset holdings (F30) |
| Regulatory frameworks (G38) | Market protectionism (D49) |
| Exogenous component of asset holdings (G19) | Larger regulatory differences (L59) |