A Cultural Explanation of the Foreign Bias in International Asset Allocation

31 Pages Posted: 12 Aug 2008 Last revised: 1 Apr 2009

See all articles by Sjoerd Beugelsdijk

Sjoerd Beugelsdijk

University of Groningen

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Date Written: February 1, 2009

Abstract

In this paper we examine the foreign bias in international asset allocation. Following extant literature in behavioral finance, we argue that a society's culture and the cultural distance between two markets play an important role in explaining the foreign bias. In particular, we hypothesize that the degree of a nation's uncertainty avoidance affects the foreign bias (more uncertainty-avoiding countries allocate less to foreign markets), as does the degree of a country's individualism (in individualistic countries performance is more directly attributed to a person and less to teams, causing these individuals to be more aggressive in their foreign asset allocations). We further expect that the degree of cultural distance between two countries affects the amount of money allocated to that market. Based on extensive robustness analyses, we find support for our hypotheses on the role of culture in international asset allocation.

Keywords: Foreign Bias, Home Bias, Culture, Portfolio Theory

JEL Classification: C24, G15, G23

Suggested Citation

Beugelsdijk, Sjoerd and Frijns, Bart, A Cultural Explanation of the Foreign Bias in International Asset Allocation (February 1, 2009). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1215782 or http://dx.doi.org/10.2139/ssrn.1215782

Sjoerd Beugelsdijk

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Bart Frijns (Contact Author)

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

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