Cultural Influences on Domestic and Foreign Bias in International Asset Allocation

Abstract

This paper examines determinants of domestic (investors overweight their domestic market) and foreign bias (investors over- or underweight foreign markets) in international asset allocation from 26 developed and developing countries. In particular, we document robust evidence that country-specific variables on familiarity and cross-cultural variables have significant impact on portfolio allocation in country’s equity portfolios. Furthermore, we confirm significant influence of economic development and stock market development on both domestic and foreign bias, while the effects of indirect channels such as capital control or investor protection are only slight.