The Determinants of Domestic and Foreign Bond Bias

Posted: 24 May 2007 Last revised: 12 Jan 2012

See all articles by Miguel A. Ferreira

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Antonio F. Miguel

Instituto Universitário de Lisboa (ISCTE - IUL)

Date Written: December 1, 2011

Abstract

This paper studies the determinants of the domestic and the foreign bond biases and their evolution over time using aggregate bond allocation data from CPIS. Our results show that the home bias is prevalent across all countries, despite the decreasing of the domestic bias in most countries in the 1997-2009 period. We find that the domestic bond bias is lower in countries with higher economic development, higher restrictions on foreign capital transactions, more developed bond markets, higher familiarity, and higher efficiency of the judicial system. When investing overseas, investors also prefer to allocate their investments in countries with higher economic development, lower restrictions on capital flows, more developed bond markets, stronger judicial systems, and higher past returns. Additionally, we find that familiarity (i.e. geographic proximity, common language, and bilateral trade) is a major determinant to decrease the foreign bias. Finally, there is no evidence that investors’ bond allocations are explained by diversification opportunities as proxied by bond markets correlations.

Keywords: Investment allocation, Home Bias, Investor protection

JEL Classification: G15, G23, G32

Suggested Citation

Ferreira, Miguel Almeida and Miguel, Antonio Freitas, The Determinants of Domestic and Foreign Bond Bias (December 1, 2011). Journal of Multinational Financial Management, Vol. 21, No. 5, 2011. Available at SSRN: https://ssrn.com/abstract=988311 or http://dx.doi.org/10.2139/ssrn.988311

Miguel Almeida Ferreira

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Antonio Freitas Miguel (Contact Author)

Instituto Universitário de Lisboa (ISCTE - IUL) ( email )

Av. das Forcas Armadas
Lisboa, 1649-026
Portugal
+351 217 903 000 (Phone)

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