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Foreign Investment in Emerging Markets: International Diversification or Familiarity Bias?

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  • Yunxiao Liu
  • James L. Park
  • Bumjean Sohn

Abstract

This study empirically tests whether foreign investors take advantage of international diversification when investing in emerging Asian markets. Using the 2007–2008 financial crisis as identification, we find that firms with higher foreign ownership had better stock returns during the financial crisis. Moreover, the diversification effect exists in five out of the eight emerging markets and is stronger in markets with a lower dynamic conditional correlation with the global market index. We also find that foreign investors prefer firms with a lower international sales ratio. In conclusion, the evidence consistently suggests that foreign investors take advantage of diversification effects.

Suggested Citation

  • Yunxiao Liu & James L. Park & Bumjean Sohn, 2018. "Foreign Investment in Emerging Markets: International Diversification or Familiarity Bias?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(10), pages 2169-2191, August.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:10:p:2169-2191
    DOI: 10.1080/1540496X.2017.1369403
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    Cited by:

    1. Said, Bahrawar & Raza, Muhammad Wajid & Elshahat, Ahmed, 2024. "Does market microstructure affect time-varying efficiency? Evidence from emerging markets," Research in International Business and Finance, Elsevier, vol. 70(PA).

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