تحت تاثیر قرار گرفتن منزل در اوراق قرضه جهانی و بازارهای سهام: نقش نوسانات نرخ ارز واقعی

This paper focuses on the role of real exchange rate volatility as a driver of portfolio home bias, and in particular as an explanation for differences in home bias across financial assets. We present a Markowitz-type portfolio selection model in which real exchange rate volatility induces a bias towards domestic financial assets as well as a stronger home bias for assets with low local currency return volatility. We find empirical support in favour of this hypothesis for a broad set of industrialized and emerging market countries. Not only is real exchange rate volatility an important factor behind bilateral portfolio home bias, but we find that a reduction of monthly real exchange rate volatility from its sample mean to zero reduces bond home bias by up to 60 percentage points, while it reduces equity home bias by only 20 percentage points.

Home bias towards holding domestic financial assets continues to be an important phenomenon of global financial markets which is poorly understood. At least since French and Poterba (1991) the fact that investors reveal a strong preference for their home countries' equity is known as home bias. A steadily growing literature has proposed several partly competing and partly complementary explanations.2 An important strand of this literature focuses on the effect of transaction and information costs on international portfolio positions, as e.g. in Tesar and Werner, 1995, Warnock, 2001, Ahearne et al., 2004, Cai and Warnock, 2004 and Chan et al., 2005 and Daude and Fratzscher (2006).3 Various recent empirical studies have challenged in particular the assumption that international diversification yields higher returns. They indeed find that investors frequently earn significantly higher returns on investments in firms that are located in close geographic proximity, due to information asymmetries and frictions (e.g. Coval and Moskowitz, 1999, Coval and Moskowitz, 2001, Hau, 2001 and Dvorak, 2005). Other studies emphasize the role of policies and of the quality of domestic institutions, such as capital controls or corporate governance, in explaining cross-country differences in financial asset holdings (e.g. Gordon and Bovenberg, 1996, Burger and Warnock, 2003, Burger and Warnock, 2004 and Gelos and Wei, 2005). A more recent strand of the literature has proposed behavioral explanations such as patriotism (Morse and Shive, 2004) or investors who maximize expected wealth relative to a group of peers (Gómez et al., 2003). Finally, others have argued that the home bias in financial asset holdings is much smaller than often assumed because domestic financial assets may provide a natural hedge against idiosyncratic risk to domestic non-tradables, such as labour income (Engel and Matsumoto, 2005 and Pesenti and van Wincoop, 2002). Interestingly, although often mentioned and its relevance being widely acknowledged, the role of exchange rate volatility has received little attention in the empirical literature on home bias and trade in financial assets. To our knowledge, there is only one systematic analysis, by Cooper and Kaplanis (1994), which develops an indirect test of the impact of domestic inflation risk in the absence of purchasing power parity (PPP). While they find that uncertain domestic inflation cannot rationalize the observed home bias, their test is based on an examination of the correlation between domestic equity returns and inflation, rather than an analysis of the impact of real exchange rate volatility on cross-border investment or home bias. The composition of global bond portfolios has also received much less attention than equity holdings. This is somewhat surprising given the fact that the over USD 50 trillion outstanding global debt securities exceeds by far the around USD 35 trillion of world stock market capitalization.4 There are two notable exceptions. First, Burger and Warnock, 2003 and Burger and Warnock, 2004 look from a US perspective at foreign participation in local currency bond markets and the composition of US foreign bond portfolios. They find that sound macroeconomic policies and institutions, such as creditor-friendly laws, attract foreign investment in local bond markets. Second, Lane (2005) shows that individual euro area economies' international bond holdings are biased towards intra-euro area holdings. Moreover, he finds that trade linkages and geographical proximity explain a considerable part of both intra- and extra-euro area bond holdings. These findings are broadly consistent with those of De Santis and Gérard (2006), which confirm that the introduction of the euro affected portfolio allocation within the euro area. The present paper takes a global perspective and focuses on the role of real exchange rate volatility as a key determinant of international portfolio allocation and home bias. The paper analyzes the importance of real exchange rate volatility in explaining cross-country differences in home bias, and in particular as an explanation for differences in home bias across financial asset classes, i.e. between equities and bonds. We use a Markowitz-type international capital asset pricing model (CAPM) which incorporates real exchange rate volatility as stochastic deviations from PPP. Given a mean–variance optimization which implies risk aversion of investors, real exchange rate volatility induces a bias towards domestic financial assets because it puts additional risk on holding foreign securities from a domestic (currency) investors' perspective, unless foreign local currency real returns and the real exchange rate are sufficiently negatively correlated. A second key implication of the model is that home bias in assets with relatively high local currency return volatility should respond less to real exchange rate volatility than home bias in assets with low local currency return volatility. This result entails that in the presence of real exchange rate volatility home bias is generally higher for assets with lower local currency return volatility. The rationale is that if return volatility of a foreign asset is low, real exchange rate volatility makes a relatively higher contribution to real return volatility of this asset, when measured in domestic currency, and vice versa. Overall, this implies that home bias should be higher for bonds than for equities as bond returns typically are less volatile than equity returns. It also means that a reduction of exchange rate volatility should have a larger impact on bond home biases than on equity home biases. We take these hypotheses to the data and test for the role of real exchange rate volatility as a driver of bilateral equity and bond home biases for 40 investor countries, covering all major industrialized and emerging market economies, and up to 120 destination countries. We find compelling empirical support for both of our main hypotheses. First, real exchange rate volatility is an important explanation for the cross-country differences in bilateral home biases in bonds and in equities. Our benchmark model with real exchange rate volatility can explain around 20% of the cross-country variation in equity and bond home biases. The aim of the paper is to motivate and explore specifically the role of exchange rate volatility, rather than to examine the large set of factors that could explain home bias in general. Nevertheless, in testing the impact of real exchange rate volatility, we also control for a set of bilateral factors that are commonly used in the gravity literature on international trade in goods and assets. In addition, the bilateral dimension of our dependent and explanatory variables allows us to control for (investor and target) country-fixed effects, i.e. for country-specific determinants when isolating the impact of real exchange rate volatility on home bias. Second, we find that bond home bias is more pronounced than equity home bias, although this stylized fact is not highly robust across country pairs. This finding is consistent with the hypothesis of our Markowitz-type international CAPM that financial assets with lower underlying volatility should exhibit a larger home bias. More importantly, we show that a reduction of the monthly real exchange rate volatility from its sample mean to zero reduces bond home bias by around 60 percentage points, while it reduces the equity home bias by only 20 percentage points. The findings of the paper have relevant implications from a number of perspectives. For the evolving literature on home bias, the results underline that exchange rate volatility is a key factor that needs be included and controlled for when modelling portfolio choices and home bias. For economic policy, the findings stress that uncertainty and risk—whether stemming from economic, political or other sources—may explain an important part of the pattern of global financial integration. The paper is organized as follows. Section 2 presents the data and some key stylized facts. Section 3 then develops a simple Markowitz-type international CAPM that links real exchange rate volatility, modelled as stochastic deviations from PPP, and portfolio choice. This model motivates the empirical analysis of Section 4, which outlines the results for explaining home bias and understanding the differences in equity and bond home biases. Section 5 concludes, briefly discussing also possible extensions and implications for policy.

Much work has been done in recent years on understanding cross-border capital flows and explaining home bias. The primary focus in this literature has been on the importance of information frictions, transaction costs, corporate governance and institutions as well as the role of non-tradables for portfolio choices. Much less systematic attention has been given to the importance of exchange rate volatility and uncertainty. The paper has analyzed the role of real exchange rate volatility as a driver of home bias. Its key insight is that the home bias in those assets with relatively high local currency return volatility responds less to real exchange rate volatility than home bias in assets with relatively low local currency return volatility. This result implies that in the presence of real exchange rate volatility home bias is generally higher for assets with lower local currency return volatility. The rationale is that if return volatility of a foreign asset is low, real exchange rate volatility makes a relatively higher contribution to real return volatility of this asset, when measured in domestic currency, and vice versa. Overall, this entails that home bias should be higher for bonds than for equities as bond returns typically are less volatile than equity returns. It also means that a change of real exchange rate volatility should have a larger impact on bond home biases than on equity home biases. The paper has tested these hypotheses empirically for 40 investor countries, covering all major industrialized and emerging market economies, and up to 120 destination countries. Overall, we find strong empirical support for both of our hypotheses. First, real exchange rate volatility is an important explanation for the cross-country differences in bilateral home biases in bonds and in equities. Our benchmark model with real exchange rate volatility can explain about 20% of the cross-country variation in equity and bond home biases. Second, we find that bond home bias is somewhat more pronounced than equity home bias. More importantly, we show that a reduction of the monthly real exchange rate volatility from its sample mean to zero reduces bond home bias by up to 60 percentage points, while it reduces the equity home bias by only 20 percentage points. These findings underline the overall importance of real exchange rate volatility as a driver of portfolio home bias. The findings of the paper have relevant implications from a number of perspectives. For the evolving literature on home bias, the results underline that exchange rate volatility is an important factor that needs be included and controlled for when modelling portfolio choices and home bias. For economic policy, the role of exchange rate volatility in explaining portfolio home bias is important, as it introduces a macroeconomic policy dimension into the considerations of international financial integration. This extends the findings of the literature that have so far mostly focused on issues such as information costs, transaction costs and governance. The importance of the exchange rate underscores the rationale for overall macroeconomic and monetary stability. This would be consistent with the general finding of the paper that uncertainty and risk—whether stemming from economic, political or other sources—may explain continued elevated levels of home bias in global financial integration. Likewise, the progress towards global monetary stability made in recent years may well be an important factor in understanding the gradual increase in the internationalization of portfolios currently observed. However, the role of the exchange rate in this context also shows that financial integration in today's world of flexible exchange rates among major currencies may be more challenging for financial actors than during the so-called golden era of globalization in the early 20th century that was characterized by the gold standard. An interesting issue is to explore whether the move towards inflation targeting—and hence, floating exchange rates—in many industrial economies and increasingly also emerging market economies indeed entails a potential costs for financial integration, at least insofar as it may have raised exchange rate volatility in the short term. Likewise, an interesting policy angle is to ask whether exchange rate stability is an important consideration underlying the still not well-understood net capital flows from emerging market economies to some industrialized countries, especially the United States, and whether the dollar-orientation of many exchange rate policies of such countries plays an important role.