What Determines the Domestic Bias and Foreign Bias? Evidence from Equity Mutual Fund Allocations Worldwide

51 Pages Posted: 2 Aug 2004

See all articles by Vicentiu Covrig

Vicentiu Covrig

California State University, Northridge - Department of Finance, Financial Planning and Insurance

Lilian K. Ng

York University - Schulich School of Business

Kalok Chan

CUHK Business School

Date Written: March 2004

Abstract

This study analyzes the detailed equity holdings of over 20,000 mutual funds from 26 developed and developing countries. Of particular interest is that we examine how this huge number of funds allocates their investment between domestic and foreign equity markets and what factors determine the distribution of their asset allocations worldwide. We find robust evidence that mutual funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock-market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors over-weighting their local markets) and the foreign bias (foreign investors under- or over-weighting the overseas markets). When a country is more developed, or is closer to the rest of the world in terms of physical distance or common language, foreign investors are attracted to that country (less foreign bias) and, in turn, proportionately fewer domestic investors are found to hold local equities (less domestic bias). Furthermore, we find that variables such as economic development, capital control, and withholding taxes also have significant, but smaller, effects on the investment decisions of foreign investors and not of domestic investors.

JEL Classification: F3, G1, G2

Suggested Citation

Covrig, Vicentiu and Ng, Lilian K. and Chan, Kalok, What Determines the Domestic Bias and Foreign Bias? Evidence from Equity Mutual Fund Allocations Worldwide (March 2004). EFA 2004 Maastricht Meetings Paper No. 2527. Available at SSRN: https://ssrn.com/abstract=404780 or http://dx.doi.org/10.2139/ssrn.404780

Vicentiu Covrig (Contact Author)

California State University, Northridge - Department of Finance, Financial Planning and Insurance ( email )

Northridge, CA 91330-8379
United States

Lilian K. Ng

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

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