Author:

Keywords:

Social Sciences, Business, Finance, Economics, Business & Economics, CAPITAL-MARKET EQUILIBRIUM, HOME BIAS, PORTFOLIO CHOICE, DIVERSIFICATION, CONSUMPTION, FAMILIARITY, PREFERENCE, OWNERSHIP, HOLDINGS, FINANCE, international portfolio diversifcation, information, 1501 Accounting, Auditing and Accountability, 1502 Banking, Finance and Investment, Finance, 3501 Accounting, auditing and accountability, 3502 Banking, finance and investment

Abstract:

Generalizing Cooper-Kaplanis (1994), we estimate implied costs that reconcile international portfolios with InCAPM predictions. Costs depend on home- and host-country characteristics and on interactions; we estimate risk tolerance rather than pre-specifying it; and we control for currency risk, inflation hedging, fixed-interest investments, round-tripping and omitted countries. Estimates for developed markets are lower than reported before, but those for new markets are quite high: 2001-2004 inward shadow costs range from 0.01% p.a. (US) to 37 (Indonesia). We find that equity home bias is related to a mixture of risks and frictions, such as information asymmetries, institutional factors and explicit costs. © The Author 2008.