Institutional investors, as professional parties, typically hold geographically diversified portfolios of marketable securities. In that way, institutional investors contribute to financial integration and risk sharing in Europe’s Capital Markets Union and beyond. Assets managed by institutional investors (defined as pension funds, insurance companies and investment funds) have increased significantly in the past fifteen years.

The equity home bias in euro area countries and in Denmark, Sweden and the United Kingdom is lower than in the newer EU member states and non-EU advanced countries. The euro area is unique in terms of debt securities: home bias is lowest and euro-area bias is highest among the country groups. This can be explained by the absence of currency risk within the euro area and indicates strong integration within the euro-area debt market.

We also calculate the home bias for the aggregate of the euro area as if the euro area was a single country. We report remarkable similarity between the euro area as a whole and the United States in terms of equity home bias, while there is a higher level of debt home bias in the United States than in the euro area as a whole. This finding indicates risk-sharing in the euro-area capital markets, both on the equity and debt side.

Finally, we test the hypothesis that the larger the assets managed by institutional investors, the smaller the home bias and thereby the greater the scope for risk sharing. Our results provide strong support for this main hypothesis. We also find that growth of institutional investors spurs capital markets. This development of Europe’s capital markets combined with the migration of capital markets activities from London to the EU27 forces policy-makers to reshape the financial architecture for the EU’s capital markets.

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Rotterdam School of Management (RSM), Erasmus University

Darvas, Z., & Schoenmaker, D. (2018). Institutional Investors and Development of Europe’s Capital Markets. Retrieved from