International equity investment and Australia's position in the global economy

Research in this thesis investigates the following issue; dynamics of international financial integration; international portfolio equity investment patterns; Australian investors? equity investment position in the global economy; and finally geographical and home bias related to equity investment. Research in this thesis employs a new International Monetary Fund?s (IMF?s) Coordinated Portfolio Investment Survey (CPIS) dataset to examine bilateral equity investment in the international and Australian context. This dataset is being employed for the first time in the Australian context. Research in this thesis provides insights into the broad trends on cross country holdings and indicates that the growth in goods trade and stock market capitalisation are the main determinants of the growth in the scale of international balance sheets. This thesis develops a model that links bilateral equity holdings to bilateral trade in goods and services. This thesis finds that the bilateral equity investment is strongly correlated with the underlying patterns of trade in goods and services. Research in this thesis states that the bilateral equity investments take place between countries with similar characteristics, including coordinated business cycles and correlated stock market returns, against the predictions of standard diversification Research in this thesis provides answers to some of the following questions; why does the pattern of Australia?s capital flows not match that of its trade flows; which bilateral factors are responsible for explaining Australia?s portfolio equity investment holdings; are cultural, informational factors important in explaining Australia?s portfolio allocations; How do regulatory and legal variables affect equity portfolio holdings. Research in this thesis investigates geographical bias by developing an empirical model from a consumption based asset pricing model that includes both, information and transaction costs. Research in this thesis documents that investors exhibit a preference for geographically close, same language and same culture countries. This thesis states that Australian investors? are willing to hold equity portfolios in countries where the judicial system is recognised as efficient and appears to uphold enforcement of the rule of law, and countries which have well developed accounting standards. Research in this thesis also investigate home bias puzzle in the international and Australian context. This thesis indicates that the share of destination countries? stock market that is invested in the host country, capital controls, trade links, risk adjusted returns and transaction costs have impact on the home bias puzzle.