International equity portfolio allocations and stock market development

Kwabi, Frank Obenpong and Thapa, Chandra and Paudyal, Krishna and Neupane, Suman (2019) International equity portfolio allocations and stock market development. Review of Quantitative Finance and Accounting. ISSN 0924-865X (In Press)

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    Abstract

    This paper examines whether the widely reported phenomena of home and foreign biases (i.e. sub-optimal 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.