A cultural explanation of the foreign bias in international asset allocation
This paper examines the foreign bias in international asset allocation. Following extant literature in behavioral finance, we argue that a society's culture and the cultural distance between two markets play an important role in explaining the foreign bias. In particular, we hypothesize that the degree of a nation's uncertainty avoidance affects the foreign bias (more uncertainty-avoiding countries allocate less to foreign markets), as does the degree of a country's individualism (in individualistic countries performance is more directly attributed to a person and less to teams, causing these individuals to be more aggressive in their foreign asset allocations). We further expect that the degree of cultural distance between two countries affects the amount of money allocated to that market. Based on extensive robustness analyses, we find support for our hypotheses on the role of culture in international asset allocation.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1996.
"Law and Finance,"
Harvard Institute of Economic Research Working Papers
1768, Harvard - Institute of Economic Research.
- Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
- La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
- Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
- Aggarwal, Reena & Klapper, Leora & Wysocki, Peter D., 2005.
"Portfolio preferences of foreign institutional investors,"
Journal of Banking & Finance,
Elsevier, vol. 29(12), pages 2919-2946, December.
- Reena Aggarwal & Leora Klapper & Peter D. Wysocki, 2003. "Portfolio preferences of foreign institutional investors," Policy Research Working Paper Series 3101, The World Bank.
- Lee Pinkowitz & Rene M. Stulz & Rohan Williamson, 2001.
"Corporate Governance and the Home Bias,"
NBER Working Papers
8680, National Bureau of Economic Research, Inc.
- Mark Grinblatt, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, 06.
- Chen, Li-Wen & Johnson, Shane A. & Lin, Ji-Chai & Liu, Yu-Jane, 2009. "Information, sophistication, and foreign versus domestic investors' performance," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1636-1651, September.
- Kang, Jun-Koo & Stulz, Rene M., 1997.
"Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan,"
Journal of Financial Economics,
Elsevier, vol. 46(1), pages 3-28, October.
- Jun-Koo Kang & Rene M. Stulz, 1995. "Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan," NBER Working Papers 5166, National Bureau of Economic Research, Inc.
- Tabellini, Guido, 2007.
"The Scope of Cooperation: Values and incentives,"
CEPR Discussion Papers
6534, C.E.P.R. Discussion Papers.
- Guido Tabellini, 2007. "The Scope of Cooperation: values and incentives," Working Papers 328, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Guido Tabellini, 2008. "The Scope of Cooperation: Values and Incentives," CESifo Working Paper Series 2236, CESifo Group Munich.
- Berkel Barbara, 2007. "Institutional Determinants of International Equity Portfolios - A Country-Level Analysis," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-33, October.
- Robert S. Shupp & Arlington Williams, 2003.
"Risk Preference Differentials of Small Groups and Individuals,"
200301, Ball State University, Department of Economics, revised Apr 2006.
- RobertS. Shupp & ArlingtonW. Williams, 2008. "Risk preference differentials of small groups and individuals," Economic Journal, Royal Economic Society, vol. 118(525), pages 258-283, 01.
- Heckman, James, 2013.
"Sample selection bias as a specification error,"
Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
- Chuck C Y Kwok & David M Reeb, 2000. "Internationalization and Firm Risk: An Upstream-Downstream Hypothesis," Journal of International Business Studies, Palgrave Macmillan, vol. 31(4), pages 611-629, December.
- Zoran Ivkovic & Scott Weisbenner, 2005. "Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments," Journal of Finance, American Finance Association, vol. 60(1), pages 267-306, 02.
- Karlsson, Anders & Norden, Lars, 2007. "Home sweet home: Home bias and international diversification among individual investors," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 317-333, February.
- Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 2001.
"Liquidity, Volatility and Equity Trading Costs across Countries and over Time,"
Wiley Blackwell, vol. 4(2), pages 221-55, Summer.
- Ian Domowitz & Jack Glen & Ananth Madhavan, 2000. "Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time," William Davidson Institute Working Papers Series 322, William Davidson Institute at the University of Michigan.
- Rene M. Stulz & Rohan Williamson, 2001.
"Culture, Openness, and Finance,"
NBER Working Papers
8222, National Bureau of Economic Research, Inc.
- Chuck C Y Kwok & Solomon Tadesse, 2006.
"National culture and financial systems,"
Journal of International Business Studies,
Palgrave Macmillan, vol. 37(2), pages 227-247, March.
- Djankov, Simeon & La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2008.
"The law and economics of self-dealing,"
Journal of Financial Economics,
Elsevier, vol. 88(3), pages 430-465, June.
- Lopez-de-Silanes, Florencio & Djankov, Simeon & La Porta, Rafael & Shleifer, Andrei, 2008. "The Law and Economics of Self-dealing," Scholarly Articles 2907526, Harvard University Department of Economics.
- Simeon Djankov & Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2005. "The Law and Economics of Self-Dealing," NBER Working Papers 11883, National Bureau of Economic Research, Inc.
- Oded Shenkar, 2001. "Cultural Distance Revisited: Towards a More Rigorous Conceptualization and Measurement of Cultural Differences," Journal of International Business Studies, Palgrave Macmillan, vol. 32(3), pages 519-535, September.
- Andy C W Chui & Chuck C Y Kwok, 2008. "National culture and life insurance consumption," Journal of International Business Studies, Palgrave Macmillan, vol. 39(1), pages 88-101, January.
- Bruce Kogut & Harbir Singh, 1988. "The Effect of National Culture on the Choice of Entry Mode," Journal of International Business Studies, Palgrave Macmillan, vol. 19(3), pages 411-432, September.
- Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
- Andy C.W. Chui & Sheridan Titman & K.C. John Wei, 2010. "Individualism and Momentum around the World," Journal of Finance, American Finance Association, vol. 65(1), pages 361-392, 02.
- Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, 06.
- Aggarwal, Raj & Goodell, John W., 2009. "Markets and institutions in financial intermediation: National characteristics as determinants," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1770-1780, October.
- Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
- Eric Van den Steen, 2004. "Rational Overoptimism (and Other Biases)," American Economic Review, American Economic Association, vol. 94(4), pages 1141-1151, September.
- Kalev, Petko S. & Nguyen, Anh H. & Oh, Natalie Y., 2008. "Foreign versus local investors: Who knows more? Who makes more?," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2376-2389, November.
- Bohn, Henning & Tesar, Linda L, 1996. "U.S. Equity Investment in Foreign Markets: Portfolio Rebalancing or Return Chasing?," American Economic Review, American Economic Association, vol. 86(2), pages 77-81, May.
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:34:y:2010:i:9:p:2121-2131. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.