What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide

We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger frac...

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Bibliographic Details
Published in:The Journal of finance (New York) 2005-06, Vol.60 (3), p.1495-1534
Main Authors: CHAN, KALOK, COVRIG, VICENTIU, NG, LILIAN
Format: Article
Language:English
Subjects:
Asset allocation
Bias
Capital market
Countries
Data analysis
Developing countries
Empirical research
Equity
Financial economics
Financial investments
Foreign investments
Foreign markets
Gross domestic product
Investment trusts
Investors
Manycountries
Market capitalization
Market development
Mutual funds
Portfolio management
Stock exchange
Stock markets
Studies
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Summary:We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2005.768_1.x