Domestic and Foreign Country Bias in International Equity Portfolios

Posted: 10 Feb 2020

Multiple version iconThere are 2 versions of this paper

Date Written: December 16, 2011


Distinguishing two components of the preference for geographical proximity – the domestic country bias assessing investors’ holdings within the domestic market, and the foreign country bias assessing investors’ bilateral holdings within a particular host, I document a number of stylized facts related to international equity portfolios. First, investors in emerging countries hold systematically larger shares in their local markets compared to investors in developed countries. Second, while investors generally allocate trivial shares to most of the available destinations and completely disregard the remaining ones, I report several positive country bias ratios suggesting that the source country's investors overweigh the destination market. Third, the portfolio equity held in only a small number of destination markets generates much of countries’ existing foreign assets. I refer to this observation as the geographical shrinkage suggesting that the domestic bias coexists with an equally imperfect diversification of investors’ foreign asset holdings.

Keywords: domestic bias, foreign bias, international portfolios, geographical shrinkage

JEL Classification: F30, G11, G15

Suggested Citation

Diyarbakirlioglu, Erkin, Domestic and Foreign Country Bias in International Equity Portfolios (December 16, 2011). Journal of Multinational Financial Management, Vol. 21, No. 5, 2011, Available at SSRN:

Erkin Diyarbakirlioglu (Contact Author)

IAE Gustave Eiffel ( email )

Place de la Porte des Champs
Créteil, 94010


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