Cross-border equity portfolio choices and the diversification motive: A fractional regression approach

- The paper models international portfolio investment positions as a choice of (bilateral) portfolio shares.
- Fractional regression models are used to model those shares.
- Using fractional regression models has important consequences in terms of results, with respect to more traditional models.
- A panel dataset was used, which allows controlling for unobserved heterogeneity, via proper (country pair) fixed effects.
- Both trade and a proxy for diversification motives are important determinants of portfolio shares.

Using a panel fractional regression model to evaluate the determinants of shares of international investment positions, we find some strong empirical support to the claim that a diversification motive is relevant. It turns out that less synchronized economies attract larger portfolio investment shares. The utmost relevance of trade relationships among countries in shaping international investment positions is also confirmed.