Globalization, home bias and asset prices
Faculty Advisor: Geert Bekaert
This dissertation contains three chapters.
The first chapter examines a large number of potential home bias determinants, including some novel ones, using extensive panel data. I distinguish between the actual home bias (overinvestment in domestic securities) and foreign investment bias, for which I propose a new measure. For foreign investment bias, I also demonstrate how "size biases" significantly affect the results. I find that the old empirical results based on the U S data alone do not generalize to the panel data set; information and familiarity variables and proxies for the degree of capital market openness play an important role in explaining both home and foreign investment biases.
The second chapter, coauthored with Geert Bekaert, investigates whether the globalization process of the last thirty years has lead to "convergence" of asset prices in a wide set of countries, encompassing both developed and emerging markets. We examine several measures of convergence for interest rates (real and nominal) and bond and equity returns, and important fundamentals as inflation and earnings growth rates. While doing so, we extensively review the extant literature. Our results do not indicate strong effects of globalization on the convergence of asset prices, even though we document some links. In particular, financial openness matters relatively more than measures of corporate governance and political risk.
The third chapter investigates the effects of foreign investment and home bias on equity valuation at the country level using a panel data set I find that once country fixed effects are taken into account, home and foreign investment biases are not value relevant. However, stock market openness in itself is the most important factor for equity valuation at the aggregate level among all explanatory variables studied in this paper.