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The effect of political stability and confidence in economic policy on cross-border fixed income portfolio allocation

Nerland, Daniel Ludvig Mahle; Salmina, Natalia
Master thesis
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URI
http://hdl.handle.net/11250/2621493
Date
2019
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  • Master of Science [963]
Abstract
This thesis investigates the extent of home bias in bond portfolios in 20

countries, in the time period 2001 to 2016. In additional to traditional drivers

of portfolio optimization, we consider the impact of the financial crisis,

political stability and economic policy on cross-border fixed income

allocation. The thesis is mainly based on data from the Coordinated

Portfolio Investment Survey by the International Monetary Fund and Ifo

World Economic Survey. In our investigation of home bias, we find a

declining trend throughout the period. We find that the strongest drivers of

cross-border bond portfolio allocation are rational portfolio optimization

factors, the degree of underweight and diversification benefits. These results

indicate that investors aim to reallocate their portfolio and close the distance

between actual weights and optimal weights following the International

Capital Asset Pricing Model to achieve a diversified portfolio. We find a

significant negative relationship between cross-border bond portfolio

holdings and political stability, and a significant positive relationship

between cross-border bond portfolio holdings and confidence in economic

policy.
Description
Masteroppgave(MSc) in Master of Business - Handelshøyskolen BI, 2019
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Handelshøyskolen BI

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