A comprehensive comparison of the financial exposure towards the Euro area and t he United States
This paper gives a comprehensive analysis of the difference in financial exposure towards the Euro Area and towards the US of global investors. It finds that, although the US is by far the number 1 destination of foreign investment in the World, according to a simple benchmark from standard portfolio theory, global investors are largely underexposed towards US securities, even after Home Bias taken into account. Euro Area investors are overexposed towards Euro Area securities. Outside EU investors are underexposed, but after taking Home Bias into account, they are close to the ICAPM benchmark. Apparently, investors around the world are more exposed towards Euro Area in their portfolios of foreign securities. This (over)exposure increased during the Global and Euro Area crisis. Further, the paper finds that countries with a more open capital account, that trade with and are close to the Euro Area and the US are more exposed towards these destinations of foreign investment. In the more general it can be concluded that determinants of investing in foreign are a more open capital account, a higher degree of governance and a higher level of GDP per capita, but a lower degree of financial development relative to the foreign destination.
Faculteit der Managementwetenschappen