The Role of Information Asimmetries and Inflation Hedging in International Equity Portfolios

Giofré, Maela M. (2009): The Role of Information Asimmetries and Inflation Hedging in International Equity Portfolios. Forthcoming in: Journal of Multinational Financial Management

Abstract

We investigate the role of information asymmetries and inflation hedging in shaping international equity portfolios. We confirm, in a multinational setting, Cooper and Kaplanis (1994) result of no inflation hedging motive driving investors' behavior and find evidence of a crucial role for financial market development and trade linkages.

• Item Type: MPRA Paper
• Language: English
• Keywords: equity home bias; portfolio choice; inflation hedging; information asymmetries
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; F - International Economics > F3 - International Finance > F30 - General; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

References

Adler, M., Dumas, B., 1983. International portfolio choice and corporation finance: a synthesis. Journal of Finance 38, 925–984.

Ahearne, A.G., Griever,W.L.,Warnock, F.E., 2004. Information costs and home bias: an analysis ofU.S. holdings of foreign equities. Journal of International Economics 62, 313–336.

Baxter, M., Jermann, U.J., 1997. The international diversification puzzle is worse than you think. American Economic Review 87(1), 170–180.

Baxter, M., Jermann, U.J., King, R.G., 1998. Nontraded goods, nontraded factors, and international non-diversification. Journal of International Economics 44 (2), 211–229.

Beck, T., Levine, R., Loayza, N., 2000. Finance and the sources of growth. Journal of Financial Economics 58, 261–300.

Berkel, B., 2004. Institutional determinants of international equity portfolios—a country-level analysis. EFA Maastricht Meetings Paper No. 2899.

Black, F., 1974. International capital market equilibrium with investment barriers. Journal of Financial Economics 1, 337–352.

Coën, A., 2001. Home bias and international capital asset pricing model with human capital. Journal of Multinational Financial Management 11, 497–513.

Cooper, I.A., Kaplanis, E., 1994. Home bias in equity portfolios, inflation hedging and international capital market equilibrium.

Review of Financial Studies 7 (1), 45–60. Coval, J., Moskowitz, T., 1999. Home bias at home: local equity preference in domestic portfolios. Journal of Finance 54, 2045–2073.

Epstein, L.G., Miao, J., 2003. A two-person dynamic equilibrium under ambiguity. Journal of Economic Dynamics and Control 27(7), 1253–1288.

Fama, E.F., Schwert,W., 1977. Asset returns and inflation. Journal of Financial Economics 5, 115–146.

Fidora, M., Fratzscher, M., Thimann, C., 2006. Home Bias in Global Bond and Equity Markets: The Role of Real Exchange Rate Volatility. ECBWorking Paper Series #685.

French, K., Poterba, J.M., 1991. International diversification and international equity markets. American Economic Review 81 (2),222–226.

Gehrig, T., 1993. An information based explanation of the domestic bias in international equity investment. Scandinavian Journal of Economics 95 (1), 97–109.

Grinblatt, M., Keloharju, M., 2001. How distance, language, and culture influence stockholdings and trades. Journal of Finance 56, 1053–1073.

Grossman, S., Stiglitz, J., 1980. On the impossibility of informationally efficient markets. American Economic Review 70 (3),393–408.

Kang, J.K., Stulz, R.M., 1997. Why is there home bias? An analysis of foreign portfolio equity ownership in Japan. Journal of Financial Economics 46 (1), 3–28.

Lane, P., Milesi-Ferretti, G.M., 2007. The international equity holdings of Euro area investors. In: Anderton, R., di Mauro, F.(Eds.), The Importance of the External Dimension for the Euro Area: Trade, Capital Flows, and International Macroeconomic Linkages. Cambridge University Press.

Lane, P., Milesi-Ferretti, G.M., 2008. International investment patterns. Review of Economics and Statistics 90 (3), 538–549.

Levy, H., Sarnat, M., 1970. International diversification of investment portfolios. American Economic Review 60 (4), 668–675.

Lewis, K., 1999. Trying to explain home bias in equities and consumption. Journal of Economic Literature 37 (2), 571–608.

Li, K., 2004. Confidence in the familiar: an international perspective. Journal of Financial and Quantitative Analysis 39 (1), 47–68.

Lintner, J., 1975. Inflation and security returns. Journal of Finance 30, 259–280.

Markowitz, H., 1952. Portfolio selection. Journal of Finance 7, 77–91.

Obstfeld, M., Rogoff, K., 2001. The six major puzzles in international macroeconomics: is there a common cause? NBER Macroeconomics Annual 15, 339–390.

Pagano, M., Roell, A., Zechner, J., 2002. The geography of equity listing: why do companies list abroad. Journal of Finance 57 (6),2651–2694.

Pesenti, P., van Wincoop, E., 2002. Can nontradables generate substantial home bias? Journal of Money, Credit and Banking 34(1), 25–50.

Portes, R., Rey, H., 2005. The determinants of cross-border equity flows. Journal of International Economics 65 (2), 269–296.

Rajan, R., Zingales, L., 1998. Financial dependence and growth. American Economic Review 88 (3), 559–586.

Sercu, P., 1980. A generalization of the international asset pricing model. Revue de l’Association Francaise de Finance 1, 91–135.

Sharpe,W., 1964. Capital asset prices: a theory ofmarket equilibrium under the condition of risk. Journal of Finance 19, 425–442.

Solnik, B., 1974. The international pricing of risk: an empirical investigation of the world capital market structure. Journal of Finance 47, 365–378.

Sorensen, B.E.,Wu, Y., Yosha, O., Zhu, Y., 2007. Home bias and international risk sharing: twin puzzles separated at birth, Journal of International Money and Finance 26, 587–605.

Strong, N., Xu, X., 2003. Understanding the equity home bias: evidence from survey data. Review of Economics and Statistics 85(2), 307–312.

Stulz, R.M., 1981. On the effects of barriers to international investment. Journal of finance 36 (4), 923–934.

Tesar, L., 1993. International risk-sharing and non-traded goods. Journal of International Economics 35, 69–89.

Tesar, L.,Werner, I., 1995. Home bias and high turnover. Journal of International Money and Finance 14 (4), 467–492.

Uppal, R.,Wang, T., 2003. Model misspecification and underdiversification. Journal of Finance 58.6, 2465–2486.

Warnock, F.E., 2002. Home bias and high turnover reconsidered. Journal of International Money and Finance 21, 795–805.