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Review of Quantitative Finance and Accounting

, Volume 37, Issue 2, pp 223–244 | Cite as

Australia’s equity home bias and real exchange rate volatility

  • Anil V. MishraEmail author
Original Research

Abstract

The main purpose of this paper is to consider the effect of real exchange rate volatility on equity investment by Australian investors. Equity investment is of major importance to savers and investors in Australia. Also real exchange rate volatility is an important influence on Australia’s financial integration in the global economy. Analysis of the effect of real exchange rate volatility on Australia’s equity home bias is important since Australian dollar is a commodity currency. There is a close relationship between Australia’s terms of trade and real exchange rate volatility. Home bias is measured on the basis of free float-adjusted market capitalization in recognition of the fact that closely held shares are not available to ordinary investors. Real exchange rate volatility is measured by deviations from purchasing power parity on a bilateral basis between Australia and 35 countries. The cross-border equity investment data over the period 2001–2007 are from International Monetary Fund’s Coordinated Portfolio Investment Survey. Australian investors are found to invest significantly less in a country if the real exchange rate volatility of that country is relatively high (results that are robust to standard control measures and generalized method of moments).

Keywords

Coordinated portfolio investment survey Float home bias Real exchange rate volatility Generalized method of moments 

JEL Classification

G11 G15 G18 

Notes

Acknowledgments

The author would like to thank the two anonymous referees and Ronald Ratti for their helpful comments and suggestions. The author would also like to thank C.F Lee, editor of RQFA, and the participants of the 16th Annual Conference on Pacific Basin Finance, Economics, Accounting and Management.

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.School of Economics and FinanceUniversity of Western SydneySydneyAustralia

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