Financial exposure to the euro area before and after the crisis: home bias and institutions at home

Maurizio Michael Habib and Vincent Floreani

No 1799, Working Paper Series from European Central Bank

Abstract: This paper investigates whether global investors are over or under exposed to- wards the euro area and the role of home bias and institutions at home in shaping this exposure. According to a simple benchmark from standard portfolio theory, euro area investors - in particular those from euro area low-rating economies - are overexposed to euro area securities. Instead, investors outside the EU are underexposed to euro area securities in their total portfolio, proportionally to their degree of home bias, but not in their foreign portfolio. Nevertheless, once we account for gravity factors, the largest foreign investors overweigh euro area securities, especially debt of euro area high rating economies. Crucially, this overexposure was resilient to the euro area crisis. Moreover, we show that institutions at home are important to explain exposure to euro area securities. In particular, the higher the standards of governance at home, the greater the exposure to the euro area debt. JEL Classification: E2, F3, G11, G15

Keywords: Cross-border portfolio holdings; home bias; institutions; international finance gravity model (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-eec and nep-opm
Note: 334027
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20151799

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