International equity portfolio allocations and stock market development

This paper examines whether investors’ suboptimal international equity portfolio diversification (IEPD) affects the development of stock markets. The results, based on rigorous analysis of macro and micro level data, shows that markets with higher degrees of equity home bias are associated with lower levels of stock market development. On the other hand, higher degrees of equity foreign bias have a positive effect on the development of the host country’s stock market. Our results imply that provisions for encouraging IEPD could be crucial policy measures in developing the depth and breadth of domestic stock markets