Australia's Bond Home Bias

Abstract

This paper constructs the float adjusted measure of home bias and explores the determinants of bond home bias by employing the International Monetary Fund's high quality dataset (2001 to 2009) on cross-border bond investment. The paper finds that Australian investors' prefer investing in countries with higher economic development and more developed bond markets. Exchange rate volatility appears to be an impediment for cross-border bond investment. Investors prefer investing in countries with stronger quality of institutions including bureaucratic quality, government effectiveness, regulatory quality, rule of law, efficiency of judicial system, risk of contract repudiation, and rating of accounting standards.

Foreign Bias in the Global Portfolio Investment of Selected OIC Countries

“…The dependent variable; foreign bias (FB) is derived based on the model-based approach that represents variations between the actual foreign portfolio holdings and the optimal benchmark (Mishra, 2011;Mishra and Conteh, 2014;Mishra, 2015;. In this model, the optimal benchmark is based on the ICAPM benchmark.…”

“…A high level of economic development offers greater potential for investment opportunities. Following Mishra and Conteh (2014), GDP per capita may influence a country's propensity to engage in international asset trade. Higher income per capita is associated with lower risk aversion which may promote international portfolio investment.…”