Working Paper: NBER ID: w4611
Authors: Linda L. Tesar; Ingrid M. Werner
Abstract: This paper studies the cross-border transactions in equity by investors in Canada, Germany,Japan, the U.K. and the U.S. We find that investors from different countries make very different decisions about the allocation of their portfolio across markets. In contradiction to the notion that high variable transactions costs hinder international diversification, we find that the volume of gross equity flows vastly exceeds net equity flows and the turnover rate on foreign equity investments by some investors even exceeds domestic turnover rates. We also reject the hypothesis that U.S. investors follow the standard CAPM in allocating their global equity portfolio.
Keywords: international equity; portfolio choice; cross-border transactions
JEL Codes: F21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investor perceptions of expected returns and risks (G11) | net acquisitions of equity (G34) |
| national characteristics and investor behavior (G40) | portfolio allocations across markets (G11) |
| high turnover rate on foreign equity investments (F21) | home bias in portfolio allocations (G11) |
| lack of significant comovement between U.S. net purchases and various financial indicators (F30) | rejection of CAPM hypothesis (G19) |
| sluggish portfolio adjustments (G31) | slow-moving state variables or frictions (C32) |