Research

This paper proposes a new channel for local risk premia in international stocks based on investor underdiversification. Holdings data reveal two facts. First, retail investors display near-perfect home bias while institutions are globally diversified. Second, institutions substantially underdiversify within each market. Institutions’ imperfect cross-market hedging generates an institutional local premium, while their limited investment scope leaves residual risk, generating a retail local premium. These premia average 4.1% and 3.3% across 21 developed markets and 7.3% and 5.8% across 20 emerging markets. Unlike the investability channel, local risk premia persist even when markets are fully open to foreign investors.

This paper proposes a new explanation for the excess co-movement in default risk observed across borrowers. We develop a model with endogenous default decisions in a multi-borrower economy, where a negative idiosyncratic shock to one borrower reduces its creditworthiness while simultaneously increasing the relative importance of another borrower. The resulting increase in systematic risk raises the borrowing costs of the latter, accelerating its default decision, particularly when short-term refinancing is required. This mechanism uncovers a novel source of default risk dependence that cannot be attributed to shared fundamental shocks alone. Moreover, the embedded leverage in equity enables our model to jointly explain excess co-movement in default probabilities, credit spreads, equity returns, and equity volatilities, aligning with recent empirical evidence across U.S. industries.

We study how ownership structure affects short selling in 40 stock markets around the world. We show that ownership by non-institutional blockholders reduces the supply of lendable shares available to short sellers, whereas ownership by foreign institutions increases it, and more strongly than domestic institutions. We establish causality by exploiting additions to the MSCI index as plausibly exogenous shocks to ownership structure. Our findings indicate that the effect of ownership structure on lending supply originates from the owners' connections (or the lack thereof) to equity lending market intermediaries and has consequences for short-selling activities globally.

We study how firm ESG performance affects domestic and foreign institutional investments. At the firm level, the marginal effects of ESG on institutional ownership vary across institution origin and investment destination countries. At the institution-firm level, institutions tilt towards high-ESG firms only when they are domestic. We term this asymmetry in ESG preference between domestic and foreign investment the “ESG home bias”. We explore ESG information environment, country E&S awareness, and ESG factor discount as potential economic mechanisms and find that the ESG home bias reflects a combination of these factors, the most important being information asymmetry about the ESG outcome measured by ESG uncertainty.

We construct a comprehensive database of public firm ownership in 49 countries and study the investment scope and preferences of different types of investors. Aggregate home bias has declined but is still much higher in emerging markets (EMs). Institutions have become more globally diversified but invest in a limited number of stocks. Retail investors remain highly home-biased. Institutions of different domiciles and types continue to show a strong preference for larger, more liquid, and more visible firms in both pooled regressions and country-level analyses but exhibit considerably heterogeneous preferences for other firm characteristics. Retail investors are mostly present in small and illiquid firms.