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

Authors

  • KALOK CHAN,

  • VICENTIU COVRIG,

  • LILIAN NG

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    • Chan is from the Department of Finance, Hong Kong University of Science and Technology; Covrig is from the Department of Finance, Real Estate and Insurance, California State University at Northridge; and Ng is from the School of Business Administration, University of Wisconsin-Milwaukee. We thank Susan Christoffersen, Gunter Dufey, Wayne Ferson, Gaston Gelos, Jack Glen, Takato Hiraki, Michael Phillips, Sergei Sarkissian, Alice Xie, an anonymous referee, the editor Rob Stambaugh, and participants at Chapman University, Korea University, the 2003 Financial Management Meetings in Denver, the “Challenges and Opportunities in Global Asset Management” conference, and the 2004 Western Finance Association Meetings in Vancouver for their helpful comments and suggestions. Chan acknowledges the Earmarked Grants from the Research Grants of Hong Kong (HKUST6010/00H) for financial support, and Covrig acknowledges financial support from the Nanyang Business School of the Nanyang Technological University, Singapore.


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.

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