=. (1)[ See Appendix 1 for more details.] Where is the assets prices in the home country. is the assets prices of the foreign country. is the exchange rate. It measures …show more content…
The first part is the desired portfolio shares change under risk aversion condition. According to the definition that the desired weights shows the investors’ expected asset returns changes in country j for the next time period and reflect the international investors’ invest behavior and risk attitude. The second part is the average changes between the difference of home and foreign countries’ price of per share of real assets. And this equation describes how the relative prices changes will affect the net foreign holdings. According to above equation, we can see that if we assume the desired portfolio shares unchanged, the change of net foreign holdings should match the changes of holder’s wealth. There will be a negative transaction effects from the changes in net foreign holdings to the real effective exchange rates due to the rebalancing model. This conclusion is said there is a negative relationship between the changes of net foreign holdings and the changes of the real effective exchange rates which match the results of Hau and Ray (2005). And from the second parts of equation (6), if the foreign stock markets have a higher return, the holding of foreign investors will increase the amount of home country’s portfolio. The error correction equation of the net foreign holdings …show more content…
According to the definition of portfolio investment, CPIS data set involves debt or equity securities and it describes portfolio investment cross-border transactions and positions. Due to the data limitations, 26 countries are chosen in the analysis process using annual data from the year 2004 to the year 2014. There are Austria, Belgium, Brazil, Canada, Chile, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, Norway, Portugal, South Africa, Switzerland, Turkey, United Kingdom and the United States. Those countries account for over 75% of global equity securities according to the CPIS data. And the sample includes 22 countries from OECD countries and Brazil, India, Indonesia and South Africa 4 non-OECD countries. Due to some data from CPIS include non-zero data which was not disclosed, so the data cut down the time before 2004 and some country sample, like Australia and China for the accurate purpose. The data on market capitalization which refers the total market value of a company’s outstanding shares are used to calculate the NFH in the equation (2). The data obtained from the Worldbank database. And to deal with non-value in the dataset, the paper putting a small value into missing or zero value cells when calculating the value of