Information Advantage and Institutional Investors’ Performance in Foreign Markets

41 Pages Posted: 5 Jun 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

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2017

Abstract

Traditional portfolio theory predicts that investors’ portfolios should be diversified across international markets. In contrast, empirical studies document that investors are more likely to invest in their home country and in familiar foreign markets. These findings imply that investors do not take advantage of international diversification opportunities. This study focuses specifically on foreign market asset allocations and examines empirically whether the familiarity driven foreign portfolio investment is a rational choice attributed to information advantage. Using a sample of over 46,000 institutional investors from 46 countries, we show that investors overweight foreign markets that are familiar but also earn higher risk-adjusted returns in those markets. Furthermore, we document that more skilled investors benefit the most from familiarity based allocations.

Keywords: Institutional investors, Under-diversification, Cultural distance, Geography, Information advantage, Familiarity

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

Suggested Citation

Fedenia, Mark A. and Skiba, Hilla and Sokolyk, Tatyana, Information Advantage and Institutional Investors’ Performance in Foreign Markets (June 1, 2017). Available at SSRN: https://ssrn.com/abstract=2980435 or http://dx.doi.org/10.2139/ssrn.2980435

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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