The Effect of Familiarity with Foreign Markets on Institutional Investors’ Performance

44 Pages Posted: 1 Feb 2017 Last revised: 19 Aug 2017

See all articles by Mark Fedenia

Mark Fedenia

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Hilla Skiba

Colorado State University

Tatyana Sokolyk

Brock University - Department of Finance, Operations & Information Systems

Date Written: July 31, 2017

Abstract

Empirical studies document that investors typically deviate significantly from a globally market value weighted portfolio, concentrating their portfolio holdings in securities domiciled in their home country and in familiar foreign markets. Evidence that home country concentration stems from an information advantage is mounting, but it is not known whether investors’ foreign portfolio concentration extends the local market information advantage to familiar foreign markets. Using a comprehensive sample of foreign portfolio allocations of institutional investors, we identify a familiarity effect where, on average, investors achieve higher risk-adjusted returns in familiar foreign markets. The familiarity effect depends on investor skill. According to our investor skill metric, high skill investors outperform low skill investors; and low skill investor performance suffers especially in unfamiliar foreign markets. These new findings on better performance outcomes in familiar foreign markets suggest that investors have an information advantage that is rationally exploited in familiar foreign markets.

Keywords: Institutional investors, Information advantage, Familiarity, Concentration, Cultural distance, Geography

JEL Classification: G11, G14, G15, G23, Z10

Suggested Citation

Fedenia, Mark A. and Skiba, Hilla and Sokolyk, Tatyana, The Effect of Familiarity with Foreign Markets on Institutional Investors’ Performance (July 31, 2017). 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=2909366 or http://dx.doi.org/10.2139/ssrn.2909366

Mark A. Fedenia

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-4502 (Phone)
608-265-3495 (Fax)

Hilla Skiba

Colorado State University ( email )

Fort Collins, CO 80523
United States
9704912205 (Phone)
9704912205 (Fax)

Tatyana Sokolyk (Contact Author)

Brock University - Department of Finance, Operations & Information Systems ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

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