Foreign Bias Research Articles

Changes in damages when liability rules change: an empirical study on compensation for the time spent in pretrial detention

In some legal systems, non-convicted pretrial detainees are to be compensated by the Government for the losses derived from their stay on remand. Several theoretical and empirical studies have analyzed some of the consequences of such compensation. This paper finds a result that said studies did not predict: a legal change that relaxed the requirements for compensation is correlated with a reduction in the amount of compensation awarded. We empirically analyze which factors are correlated with the amount of compensation awarded in these cases by Spanish courts from 1990 until today. Our econometrical analysis finds that (i) this amount has drastically decreased after the Supreme Court, by establishing that every non-convicted pretrial detainee is to be compensated, significantly expanded the set of cases where such compensation is due. Moreover: (ii) the longer the time spent on remand, the lower the daily compensation awarded; (iii) those who work receive higher damages than those who do not work, but there are notable (and apparently unjustifiable) differences by type of work; e.g., police officials get much higher awards than other claimants; (iv) we find no gender nor foreign bias.

The influence of cultural norms on international equity allocation

We investigate the effect of cultural tightness-looseness on foreign bias in international equity allocation using data for 29 home investor countries and 37 destination countries for the period 2001–2018. We find that investors from a tight (loose) culture will exhibit less (more) portfolio diversification among foreign markets. Further, cultural tightness-looseness moderates the effect of Hofstede’s cultural values on foreign portfolio allocation decisions differently and depending on the cultural dimension analyzed. The consideration of cultural tightness-looseness in the models diminishes the contradictory and inconclusive results regarding the relationships between cultural values and foreign bias from previous studies. These results hold for various robustness checks.

Foreign Bias in the Global Portfolio Investment of Selected OIC Countries

Home bias reflects the propensity of investors to invest substantially in the domestic market. When investing abroad investors exhibit foreign bias, a tendency to overweight certain foreign markets based on their preferences. A thorough review of the literature reveals that foreign bias has not been thoroughly investigated in emerging countries, especially in the context of OIC countries. The purpose of this research is to examine the determinants of foreign bias in the global portfolio investment of selected OIC countries. An unbalanced bilateral panel data of 12 OIC countries’ outward equity investment in 74 host countries from the year 2001 to 2016 is analyzed. Cross-sectional analysis shows that OIC countries exhibit higher foreign bias towards their OIC counterparts especially in the MENA region. The results suggest, OIC countries not only exhibit foreign bias but also demonstrate regional bias. System Generalized Method of Moments (GMM) empirically shows that foreign bias is possibly explained by factors related to financial market openness, familiarity, information asymmetry, and global financial crisis. This study has a significant implication for the investors, fund managers and the regulators of the OIC countries. Investors and fund managers in OIC countries should be aware of the existence of foreign bias in their global portfolio investment that may potentially reduce the benefits of optimal diversification. It is a call for policymakers in the OIC countries to convince their local investors that international portfolio diversification offers risk sharing and eventually increases investment return.

Foreign bias in institutional portfolio allocation: The role of social trust

We study the role of social trust in the equity allocation decisions of global investors using a large sample of institutionally managed portfolios of 8,088 investors from 33 countries over the 2000 through 2017 period. The negative relationship between social trust and foreign bias suggests that institutional investors from high-social trust countries are less prone to underinvesting in foreign equity. Our results provide credence to an information-based explanation, indicating that social trust reduces foreign bias by compensating for the lack of information about foreign stock markets. Moreover, the effect of social trust on foreign bias is stronger if host-country institutions are weak, while it vanishes when the host country is characterized by strong institutions. The informal institution of social trust compensates for the lack of well-functioning formal country-level institutions in international portfolio decisions. Finally, the allocation effect resulting from social trust is different from “blind” trust. The portfolios of high-trust investors exhibit higher cross-country diversification and an enhanced portfolio risk-return trade-off.

كلمة العدد (إنجليزي)

كلمة العدد (إنجليزي)

Beliefs that provide a foundation for heuristics and biases in financial decision-making

Heuristics and biases are the result of intuitive thinking, which is shaped starting from intuitions, feelings, and impressions, which later emerge as beliefs once processed through analytical thinking. In this study, we examine beliefs that provide a foundation for heuristics and biases in financial decision-making through in-depth interviews with 31 upper-class Mexican emerging adults. We found feelings of mistrust that provide a foundation for foreign bias, non-herding behavior and reliance on professional advice, as well as lower-risk investing beliefs that then drive sustainable investing. We also found reflection that their money, in light of their narrative is either saved or invested regardless of its source and that lenders were framed as investors to avoid the shame they associate with borrowing. Implications for future research, educational interventions and providers of financial services are discussed.

Ambiguity, ambiguity aversion and foreign bias: New evidence from international panel data

This paper provides novel empirical evidence on the relationship between ambiguity, ambiguity aversion and foreign bias in equities. We show that, after an increase in the level of domestic ambiguity relative to the level of foreign ambiguity, more ambiguity averse investors see a larger fall in foreign bias than less ambiguity investors. This finding is consistent with ambiguity operating through an information quality channel but at odds with interpretations based on familiarity. We proxy for the level of ambiguity using the prediction errors around variance forecasts based on state-of-the-art volatility models for 23 developing and emerging markets. Our measure of ambiguity aversion comes from an international survey and is based on an Ellsberg-type urn experiment. Cross-sectional regressions show that home country ambiguity aversion correlates positively with foreign bias. The results are robust to the inclusion of a broad set of control variables, changes in sample size and different ways of computing variance forecasts and the level of ambiguity. However, the results suggest that this fall in foreign bias is not associated with an improvement of international diversification.

Do global equity mutual funds exhibit home bias?

We study a sample of U.S. global equity mutual funds that invest in markets around the world. While the existing literature shows significant home bias among investors, we find that U.S. global funds on average do not exhibit home bias but with cross-fund variation. Fund manager teams with more foreign educational background, younger fund managers, and those with MBA degrees tend to invest more in international markets. When sorting funds into deciles by the level of home bias, we find that both home- and foreign-biased funds tend to outperform medium decile funds and hold concentrated portfolios, supporting the information hypothesis for home and foreign bias. Further, the well-performing foreign-biased funds are much larger than other funds, indicating that there are no decreasing returns to scale among global equity mutual funds.

International portfolio diversification and genetic relatedness

The purpose of this paper is to shed some light on how relatedness between counterparties can explain investment behavior, specifically how much can investor’s inherited traits influence the exchange of capital. We use the genetic distance index and regress it against the foreign bias measure on pairs from 40 countries on a time period from 2001-2016. We identify that the prior exerts a significant impact on foreign investment decision, even when controlling for previous documented determinants of foreign bias. These findings reflect that international portfolio allocation is obstructed by the cultural wedge created between source and destination country, since relative difference in these characteristics disturb the flow of equity investments across markets, which ultimately hinder diversification.

Ambiguity Aversion Can Lead to Lower Foreign Bias: New Empirical Evidence From an International Panel Study

Ambiguity Aversion Can Lead to Lower Foreign Bias: New Empirical Evidence From an International Panel Study

Determinants of foreign and domestic investment bias in global bond markets: Some empirical evidence

In this paper, we define foreign (domestic) bias as the deviation of foreign (domestic) investors’ actual portfolio allocation in a bond market from the same bond market’s weight in global bond market. We investigate the determinants of foreign and domestic investment bias in 41 global bond markets. Our evidence indicates that foreign investors significantly overweigh markets that offer better risk-return profiles. Such return driven behavior of foreign investors is especially pronounced in emerging bond markets. Foreign investors are also found to avoid volatility in highly controlled bond markets. Our evidence sheds some light on the importance of improving investor profile in emerging markets.

FOREIGN BIAS OF SOVEREIGN WEALTH FUND AND SPATIAL SPILLOVER EFFECTS

This study explores a foreign bias model to examine if the degree of foreign bias of sovereign wealth fund depends on the spatial spillover effects of cultural distances. Using the spatial panel data of foreign investment by sovereign wealth fund in 2008–2014, we empirically test (1) whether the relationships between return, risk and foreign bias of sovereign wealth fund are statistically significant and (2) whether this relationship depends on the spatial spillover effects of cultural distances. The evidence strongly supports our hypotheses across six target countries (Australia, Canada, China, Germany, the United Kingdom and the United States).

Suboptimal international equity portfolio diversification and stock market development

This paper examines whether the widely reported phenomena of home and foreign biases (i.e. suboptimal international equity portfolio diversification) hold any ramifications for the development of stock markets. The results, analysed using macro- and micro-level data, support the view that stock markets that are characterised by a higher degree of home bias are associated with lower levels of development. On the other hand, markets where foreign investors show a higher degree of allocation preference, relative to the prescribed benchmark (foreign bias), are found to be more developed. The results, which are robust to the use of shock based identification strategy, indicate that policy measures that promote optimal international equity portfolio diversification could be crucial in developing the depth and breadth of domestic stock markets.

Foreign and Domestic Investment in Global Bond Markets

Gauging foreign (domestic) biases as the deviation of foreign (domestic) investors’ actual portfolio allocation of a bond market from the same bond market’s weight in global bond market, we investigate the determinants of foreign and domestic investment biases in 41 global bond markets. We find that foreign investors significantly overweigh markets that offer better risk–return profiles. In addition, greater market openness and sound macroeconomic outlook attract foreign investment. Such return driven behavior of foreign investors is especially pronounced in emerging bond markets. Meanwhile, home bias is higher in smaller bond markets. Our evidence sheds some light on the role of regional financial integration on broadening investor base and improving investor profile in emerging markets.

Cost of sovereign debt and foreign bias in bond allocations

Finance theory suggests that markets where foreign bond portfolio investors overweight their portfolio relative to the prescribed theoretical benchmark should experience higher international risk sharing. Correspondingly, the cost of debt in such markets should be lower compared to markets facing a lower degree of international risk sharing. We empirically examine this prediction using a panel data set of sovereign bond yield spreads and a measure of suboptimal foreign bond portfolio allocations for 50 emerging and ten developed markets. Consistent with theory, our results show higher levels of foreign bond allocations – relative to the theoretical benchmark – are negatively related to the cost of debt. These results have important policy implications as a country’s cost of debt could potentially be lowered by encouraging foreign portfolio investors to hold their optimal allocation.

Foreign bias in bond portfolio investments: the role of economic and non-economic factors and the impact of the global financial and sovereign debt crises

ABSTRACTIn this study we examine whether theoretically inconsistent foreign bond allocations are associated with economic fundamentals and/or non-economic behavioural factors. Using panel data for 54 developed and emerging markets spanning a temporal period of 12 years, the results show that non-economic factors, that is, familiarity with foreign markets and behavioural characteristics of source markets, are the stronger drivers of biases in foreign bond allocations. Further, using the recent 2009–2011 European sovereign debt crisis as an experimental set-up, we find that investors reduce their foreign bond allocations during the debt crisis, with the withdrawals being more severe from the most affected countries. We also find that the relevance of familiarity with foreign markets becomes more pronounced during the European debt crisis. However, in case of the recent 2007–2009 global financial crisis, we find no evidence of change in foreign bias by international bond investors.

A Measure of Pure Home Bias*

The literature on international equity holdings distinguishes between home bias (overweighting of home stocks) and foreign bias (relative underweighting for more “distant” countries). The two biases can be integrated into one distance-based model. We define pure home bias as the excess of home bias relative to this model, and find pure home bias only in emerging markets. Countries with high tax rates and low credit standing have higher pure home bias, and more development comes with lower distance aversion. Methodologically, the choice of portfolio bias measure matters. We find the best measure to be a covariance-based measure relative to the world average.

Nigerian Shoppers/Consumers Preferences for Foreign and Domestic Products: Case Study of Clothes and Shoes

Based on extant literature, studies have shown that consumers adjust their attitudes toward a product according to its country-of-origin. This could be local home country bias or foreign country bias depending on individual orientation. The study compares Nigerian shoppers/consumer preferences for foreign and domestic produced clothes and shoes. The study focus on general product attributes, marketing activities and buying habits as preference indicators. The study also uses survey data of traders and shoppers to explain the issue. The research was conducted in Lagos and the samples selected include 600 respondents of both youth and adult between the ages of 16-60 years. The data were collected based on convenience sample from shoppers and traders in Lagos shopping malls and also Balogun/Tinubu market in Lagos Island-the most popular market for sales of clothes and shoes in Lagos. Collected data for the research was through questionnaire distribution to both youth and adults. Data were analyzed using descriptive statistics, percentages and t-test analysis. The findings indicated that Nigerian shoppers/consumers show more positive preference to foreign made clothes and shoes than to made in Nigeria, and that they are willing to pay higher price for foreign made clothes and shoes because they know that it is of a superior quality than made in Nigeria ones. Results also suggest that country of manufacture and product quality strongly influence consumer decision of purchasing foreign available clothes and shoes. The study provides insights with respect to Nigerian’s preference of foreign made clothes and shoes to locally-made ones.

Foreign bias in Australia's international equity holdings

The paper uses various approaches: capital asset pricing, mean-variance, global minimum-variance, Bayes-Stein, Bayesian and multi-prior to develop foreign equity bias measures for Australia’s international equity holdings in 41 countries, over the period 2001 to 2012. Bayesian models allow for various degrees of mis-trust in the ICAPM model. Multi-Prior restricts the expected return for each asset to lie within specified confidence interval around its estimated value. Mean-Variance computes optimal weights by sample estimates of mean and covariance matrix of sample return. Bayes-Stein shrinks each asset’s historical mean return toward the return of the minimum variance portfolio and improves precision associated with estimating the expected return of each asset. The plausible sources of foreign equity bias are trade, GDP per capita, real GDP growth rate, exchange rate volatility, tax credit, stock market development, familiarity and institution variables. The paper finds that economic cost of the observed foreign bias is low. The paper analyses correlation effect on the foreign bias and finds that economic loss decreases with an increase in correlation.

Sovereign Wealth Fund, Foreign Bias and Spatial Spillover Effects

Sovereign Wealth Fund, Foreign Bias and Spatial Spillover Effects