A Cultural Explanation of the Foreign Bias in International Asset Allocation
31 Pages Posted: 12 Aug 2008 Last revised: 1 Apr 2009
Date Written: February 1, 2009
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: Suggested Citation