Suboptimal international equity portfolio diversification and stock market development

Frank O. Kwabi (), Chandra Thapa (), Krishna Paudyal and Suman Neupane
Additional contact information
Frank O. Kwabi: De Montfort University
Chandra Thapa: University of Strathclyde

Review of Quantitative Finance and Accounting, 2020, vol. 54, issue 1, No 13, 389-412

Abstract: Abstract This paper examines whether the widely reported phenomena of home and foreign biases (i.e. suboptimal international equity portfolio diversification) hold any ramifications for the development of stock markets. The results, analysed using macro- and micro-level data, support the view that stock markets that are characterised by a higher degree of home bias are associated with lower levels of development. On the other hand, markets where foreign investors show a higher degree of allocation preference, relative to the prescribed benchmark (foreign bias), are found to be more developed. The results, which are robust to the use of shock based identification strategy, indicate that policy measures that promote optimal international equity portfolio diversification could be crucial in developing the depth and breadth of domestic stock markets.

Keywords: International equity portfolio diversification; Stock market development; Equity home bias; Equity foreign bias; Shock based identification strategy (search for similar items in EconPapers)
JEL-codes: F3 G11 G14 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-019-00793-9

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