International Portfolio Investment:
Theory, Evidence, and Institutional Framework

Contents

1 Introduction and Overview....................................................................................................1

2 The International Dimensions of Portfolio Investment .......................................................5

2.1 Principles of International Portfolio Investment.............................................................5

2.2 International Portfolio Investment and U.S. Securities Markets ..................................10

3 The Benefits from International Portfolio Investment ......................................................12

3.1 Participation in Growth of Foreign Markets...............................................................13

3.2 Hedging of Consumption Basket...............................................................................16

3.3 International Portfolio Diversification.........................................................................21

3.3.1 Benefits from International Portfolio Diversification.................................21

3.3.2 Empirical Evidence of International Portfolio Diversification.....................23

3.4 Market Segmentation...............................................................................................31

3.4.1 Benefits from Market Segmentation........................................................31

3.4.2 Empirical Evidence of Market Segmentation...........................................33

4 Unique Risks of and Institutional Constraints for International Portfolio Investment ....37

4.1 Unique Risks of International Portfolio Investment .....................................................37

4.1.1 Currency Risk .......................................................................................37

4.1.2 Country Risk.........................................................................................41

4.2 Institutional Constraints for International Portfolio Investment.....................................43

4.2.1 Taxation................................................................................................44

4.2.2 Foreign Exchange Controls ....................................................................47

4.2.3 Capital Market Regulations....................................................................49

4.2.4 Transaction Costs..................................................................................50

4.2.5 Familiarity with Foreign Markets............................................................52

5 Channels for International Portfolio Investment ...............................................................53

5.1 Direct Foreign Portfolio Investment...........................................................................54

5.1.1 Purchase of Foreign Securities in Foreign Markets..................................54
     

5.1.2 Purchase of Foreign Securities in the Domestic Market...........................56

5.2 Indirect Foreign Portfolio Investment.........................................................................60

5.2.1 Equity-linked Eurobonds........................................................................60

5.2.2 Purchase of Shares of Multinational Companies......................................61

5.2.3 International Mutual Funds.....................................................................70

6 Summary and Conclusion....................................................................................................73

References...............................................................................................................................75

Notes on Contributors/Acknowledgements...........................................................................118
     

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