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Journal of Finance Vol. 60 No. 3 2005

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

Kalok Chan; Vicentiu Covrig; Lilian Ng1,2,3,4,5

1 California State University System · 2 University of Wisconsin System · 3 Hong Kong University of Science and Technology · 4 Xi'an University of Finance and Economics · 5 University of Hong Kong

Abstract

We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these 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 overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias.

DOI
10.1111/j.1540-6261.2005.768_1.x
Volume
60
Issue
3
Pages
1495-1534
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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