Domestic and foreign country bias in international equity portfolios

Erkin Diyarbakirlioglu

Journal of Multinational Financial Management, 2011, vol. 21, issue 5, 301-329

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: F30 G11 G15 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:21:y:2011:i:5:p:301-329

DOI: 10.1016/j.mulfin.2011.07.002

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