Bertaut, Carol C., and William Griever, 2004, “Recent Developments in Cross-Border Investments in Securities,” Federal Reserve Bulletin, Winter 2004, pp. 19–31.
Blanchard, Olivier, Francesco Giavazzi, and Filipa Sa, 2005, “The U.S. Current Account and the Dollar,” working paper available at http://www.brookings.edu/es/commentary/journals/bpeamacro/forum/papers.htm.
International Monetary Fund, 2004b, “Risk Management and the Pension Fund Industry,” Global Financial Stability Report, September.
Lewis, Karen K., 1999, “Trying to Explain Home Bias in Equities and Consumption,” Journal of Economic Literature, Vol. 37, pp. 571–608.
Tesar, Linda L., and Ingrid Werner, 1995, “Home Bias and High Turnover,” Journal of International Money and Finance, Vol. 14., No.4, pp. 467–492.
Prepared by Chris Walker (ext. 38483).
See, for example, April 2004 GFSR and September 2004 GFSR.
This is measured as [(foreign assets held by domestic residents)/(domestic market capitalization + foreign assets held by domestic residents–domestic assets held by foreign residents)]/[(world market capitalization–domestic market capitalization)/(world market capitalization)]. This measure is also used in Bertaut and Griever (2004).
In the April 2005 WEO, this result is described as a relative lack of change in Japanese home bias, as the measure of home bias is implicitly computed as the difference between actual and benchmark holdings of foreign assets (the numerator and denominator of the FAAR), rather than as the ratio of the two. Because Japan’s equity market capitalization declined substantially as a share of the world market capitalization in the 1990s, the FAAR and the WEO measures yield divergent conclusions about the home bias trend in Japan.
There is some divergence from the FAARs for Japan in 2003, as different sources, including domestic flow of funds data, are used in the time series calculation.
In practice, a large proportion of asset allocations appeared to be guided by the following limits: at least 50 percent in safe assets (government bonds or bank deposits), and no more than 30 percent in equities, no more than 30 percent in foreign assets, and no more than 20 percent in real estate.
The Defined Contribution Pension Law of 2001 opened the way for the establishment of such plans.
Defined contribution plans still accounted for only about 1 percent of private pensions at the end March 2004, but appear to have grown rapidly since then. As noted in Chapter III of the September 2004 GFSR, there is a sense in which defined contribution fund managers do not have a liability matching problem, since they are only committed to paying beneficiaries according to the eventual value of the fund’s investments. However, the fund manager’s fiduciary responsibility, and the goal of most fund beneficiaries, is to provide an adequate or desired level of income in retirement.
The theoretical conditions underlying the ICAPM may not obtain in practice. In addition, the theoretical model does not indicate the scale of gains from moving to a more efficient portfolio, or whether the gains would outweigh the associated transactions costs.
Because the frontier is depicted in risk-return (expected return, standard deviation) space, it is not possible to see directly from the location of a portfolio in that space what the composition of the portfolio is. For points on the frontier, however, there is a one-to-one correspondence with a specific portfolio mix of the four assets. Two of these frontier points are shown relative to the “actual” portfolio, with the composition of the portfolios identified in boxes in the diagram.
Any shift to the northwest in the diagram represents a gain for a risk averse investor, whatever the investor’s relative risk aversion. Holding expected returns steady and reducing volatility corresponds to a shift from point A to point B; holding volatility steady and raising expected returns corresponds to a shift to point C.
The actual portfolio in the first column does not include the government’s holdings of $673 billion in net international reserves (NIR) (end-2003), most of which is held in foreign bonds. The second column shows portfolio expected return and variance computed to include NIR.
If Japanese investors shift their portfolios from domestic to foreign assets, relative to the benchmark case, then foreigners must be induced through relative price changes to shift their portfolios in the direction of holding more Japanese assets—otherwise, asset markets will not clear. This requires offering a higher return to foreigners from holding Japanese assets than in the benchmark case, which requires that the yen be expected to appreciate over time. This requirement is met in the model with a one-time initial depreciation, followed by gradual appreciation.