Template-Type: ReDIF-Paper 1.0
Author-Name: Wenxin Du
Author-X-Name-First: Wenxin
Author-X-Name-Last: Du
Author-Name: Alessandro Fontana
Author-X-Name-First: Alessandro
Author-X-Name-Last: Fontana
Author-Name: Petr Jakubik
Author-X-Name-First: Petr
Author-X-Name-Last: Jakubik
Author-Name: Ralph S J Koijen
Author-X-Name-First: Ralph
Author-X-Name-Last: Koijen
Author-Name: Hyun Song Shin
Author-X-Name-First: Hyun Song
Author-X-Name-Last: Shin
Title: International portfolio frictions
Abstract: We study patterns and implications of global asset allocations of European insurers and banks using newly available supervisory data. We show that the total assets of insurance companies and pension funds (ICPF) far exceed the amount of government bonds outstanding in Europe, and that countries with a large ICPF sector tend to have a large corporate bond market. Despite high levels of
international investments, the characteristics of domestic financial markets still loom large in insurers’ and banks’ portfolio allocation, with two newly documented international portfolio frictions playing a prominent role. First, when investing abroad, insurers and banks do not offset attributes of the domestic markets (such as the composition of fixed-income markets, interest rates, and sovereign credit risk), which we label “domestic projection bias.” Second, subsidiaries of multinational groups act like local entities, which we label the “going native bias.” We propose a theoretical framework to explain our empirical findings and discuss the broader policy implications for European capital market deepening and integration, monetary policy transmission and financial stability, and a multi-sectoral approach to regulatory design.
Creation-Date: 2023-10
File-URL: https://www.bis.org/publ/work1137.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1137.htm
File-Format: text/html
Number: 1137
Keywords: Banks, insurance companies, pension funds, portfolio choice, fixed income, home bias
Classification-JEL: G2, G11, G15, G21, G22, G28
Handle: RePEc:bis:biswps:1137