JAPANESE AND UNITED-STATES CROSS-BORDER COMMON-STOCK INVESTMENTS

At the end of 1989, Japanese investors held just over 1% of the U.S. stock market, while U.S. investors held less than 1% of the Tokyo market. This pattern of very limited cross-holding has persisted for nearly two decades, despite the diversification gains from cross-border investment. None of the standard explanations for limited international equity holding, such as capital controls on Japanese investors or limits on the international exposure of institutional portfolios, appears satisfactory. To justify these patterns, investors in both the United States and Japan must believe, inconsistently, that expected returns are substantially higher in their own market than in foreign markets. © 1990.