IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/63376.html
   My bibliography  Save this paper

Foreign Bias in Australian Domiciled Mutual Fund Holdings

Author

Listed:
  • Mishra, Anil V

Abstract

The paper develops foreign equity bias measures for Australian domiciled mutual funds, which invest in 41 countries worldwide, over the period 2002 to 2012, by employing various models i.e. International Capital Asset Pricing, Mean-Variance, Minimum-Variance, Bayes-Stein, Bayesian and Multi-Prior. The Bayesian measures that take into account various degrees of mistrust in ICAPM have lower values of foreign equity bias as compared to ICAPM. The Bayesian measures suggest that Australian domiciled mutual funds prefer investing in U.S., U.K., Japan and other developed countries. Paper finds that the plausible sources of foreign equity bias are GDP per capita, exchange rate volatility, foreign listing, tax credit, global financial crisis and stock market development, familiarity, institution and stock characteristic variables. There are policy implications associated with foreign bias.

Suggested Citation

  • Mishra, Anil V, 2015. "Foreign Bias in Australian Domiciled Mutual Fund Holdings," MPRA Paper 63376, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:63376
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/63376/1/MPRA_paper_63376.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ledoit, Olivier & Wolf, Michael, 2004. "A well-conditioned estimator for large-dimensional covariance matrices," Journal of Multivariate Analysis, Elsevier, vol. 88(2), pages 365-411, February.
    2. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    3. Zhenyu Wang, 2005. "A Shrinkage Approach to Model Uncertainty and Asset Allocation," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 673-705.
    4. Bong‐Chan Kho & René M. Stulz & Francis E. Warnock, 2009. "Financial Globalization, Governance, and the Evolution of the Home Bias," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 597-635, May.
    5. Suh, Jungwon, 2005. "Home bias among institutional investors: a study of the Economist Quarterly Portfolio Poll," Journal of the Japanese and International Economies, Elsevier, vol. 19(1), pages 72-95, March.
    6. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 229-259.
    7. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
    8. Louis K.C. Chan & Jason Karceski & Josef Lakonishok, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," NBER Working Papers 7039, National Bureau of Economic Research, Inc.
    9. Torben Lütje & Lukas Menkhoff, 2007. "What drives home bias? Evidence from fund managers' views," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(1), pages 21-35.
    10. Ravi Jagannathan & Tongshu Ma, 2003. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," Journal of Finance, American Finance Association, vol. 58(4), pages 1651-1683, August.
    11. Papaioannou, Elias, 2009. "What drives international financial flows? Politics, institutions and other determinants," Journal of Development Economics, Elsevier, vol. 88(2), pages 269-281, March.
    12. Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Information Immobility and the Home Bias Puzzle," Journal of Finance, American Finance Association, vol. 64(3), pages 1187-1215, June.
    13. Mishra, Anil V., 2014. "Australia's home bias and cross border taxation," Global Finance Journal, Elsevier, vol. 25(2), pages 108-123.
    14. Dahlquist, Magnus & Pinkowitz, Lee & Stulz, René M. & Williamson, Rohan, 2003. "Corporate Governance and the Home Bias," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(1), pages 87-110, March.
    15. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    16. Victor DeMiguel & Lorenzo Garlappi & Francisco J. Nogales & Raman Uppal, 2009. "A Generalized Approach to Portfolio Optimization: Improving Performance by Constraining Portfolio Norms," Management Science, INFORMS, vol. 55(5), pages 798-812, May.
    17. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    18. Philip R. Lane & Gian Maria Milesi-Ferretti, 2008. "International Investment Patterns," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 538-549, August.
    19. Larry R. Gorman & Bjorn N. Jorgensen, 2002. "Domestic versus International Portfolio Selection: A Statistical Examination of the Home Bias," Multinational Finance Journal, Multinational Finance Journal, vol. 6(3-4), pages 131-166, September.
    20. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
    21. Glassman, Debra A. & Riddick, Leigh A., 2001. "What causes home asset bias and how should it be measured?," Journal of Empirical Finance, Elsevier, vol. 8(1), pages 35-54, March.
    22. Mondria, Jordi & Wu, Thomas, 2006. "The Puzzling Evolution of the Home Bias, Information Processing and Financial Openness," Santa Cruz Department of Economics, Working Paper Series qt4wg39067, Department of Economics, UC Santa Cruz.
    23. Green, Richard C & Hollifield, Burton, 1992. "When Will Mean-Variance Efficient Portfolios Be Well Diversified?," Journal of Finance, American Finance Association, vol. 47(5), pages 1785-1809, December.
    24. Sergei Sarkissian, 2004. "The Overseas Listing Decision: New Evidence of Proximity Preference," The Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 769-809.
    25. Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004. "Information costs and home bias: an analysis of US holdings of foreign equities," Journal of International Economics, Elsevier, vol. 62(2), pages 313-336, March.
    26. Mark Britten‐Jones, 1999. "The Sampling Error in Estimates of Mean‐Variance Efficient Portfolio Weights," Journal of Finance, American Finance Association, vol. 54(2), pages 655-671, April.
    27. Lau, Sie Ting & Ng, Lilian & Zhang, Bohui, 2010. "The world price of home bias," Journal of Financial Economics, Elsevier, vol. 97(2), pages 191-217, August.
    28. Pastor, Lubos & Stambaugh, Robert F., 2000. "Comparing asset pricing models: an investment perspective," Journal of Financial Economics, Elsevier, vol. 56(3), pages 335-381, June.
    29. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
    30. Ledoit, Olivier & Wolf, Michael, 2003. "Improved estimation of the covariance matrix of stock returns with an application to portfolio selection," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 603-621, December.
    31. repec:bla:jfinan:v:58:y:2003:i:4:p:1651-1684 is not listed on IDEAS
    32. Mondria, Jordi & Wu, Thomas, 2010. "The puzzling evolution of the home bias, information processing and financial openness," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 875-896, May.
    33. Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," The Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 41-81, January.
    34. Campbell, Rachel A. & Kraussl, Roman, 2007. "Revisiting the home bias puzzle: Downside equity risk," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1239-1260, November.
    35. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
    36. Ľuboš Pástor, 2000. "Portfolio Selection and Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(1), pages 179-223, February.
    37. Karsten Jeske, 2001. "Equity home bias: Can information cost explain the puzzle?," Economic Review, Federal Reserve Bank of Atlanta, vol. 86(Q3), pages 31-42.
    38. Poshakwale, Sunil S. & Thapa, Chandra, 2011. "Investor protection and international equity portfolio investments," Global Finance Journal, Elsevier, vol. 22(2), pages 116-129.
    39. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    40. Coen, Alain, 2001. "Home bias and international capital asset pricing model with human capital," Journal of Multinational Financial Management, Elsevier, vol. 11(4-5), pages 497-513, December.
    41. Edwards,Jeremy & Franks,Julian & Mayer,Colin & Schaefer,Stephen (ed.), 1986. "Recent Developments in Corporate Finance," Cambridge Books, Cambridge University Press, number 9780521329644, January.
    42. Solnik, Bruno H., 1974. "An equilibrium model of the international capital market," Journal of Economic Theory, Elsevier, vol. 8(4), pages 500-524, August.
    43. Baele, Lieven & Pungulescu, Crina & Ter Horst, Jenke, 2007. "Model uncertainty, financial market integration and the home bias puzzle," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 606-630, June.
    44. repec:hal:spmain:info:hdl:2441/1shj1p7td8e0r5c9fcsnk8a91 is not listed on IDEAS
    45. Bekaert, Geert & Harvey, Campbell R, 1995. "Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-444, June.
    46. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    47. Huberman, Gur, 2001. "Familiarity Breeds Investment," The Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-680.
    48. De Moor, Lieven & Sercu, Piet & Vanpée, Rosanne, 2010. "The plausibility of risk estimates and implied costs to international equity investments," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 623-644, September.
    49. Hasan, Iftekhar & Simaan, Yusif, 2000. "A rational explanation for home country bias," Journal of International Money and Finance, Elsevier, vol. 19(3), pages 331-361, June.
    50. Barron, John M. & Ni, Jinlan, 2008. "Endogenous asymmetric information and international equity home bias: The effects of portfolio size and information costs," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 617-635, June.
    51. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-278, July.
    52. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(3), pages 279-292, September.
    53. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October.
    54. Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," The Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-342.
    55. Norman Strong & Xinzhong Xu, 2003. "Understanding the Equity Home Bias: Evidence from Survey Data," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 307-312, May.
    56. Veronika K. Pool & Noah Stoffman & Scott E. Yonker, 2012. "No Place Like Home: Familiarity in Mutual Fund Manager Portfolio Choice," The Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2563-2599.
    57. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
    58. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    59. Mark Grinblatt & Matti Keloharju, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, June.
    60. Geoffrey J. Warren, 2010. "Equity home bias in Australian superannuation funds," Australian Journal of Management, Australian School of Business, vol. 35(1), pages 69-93, April.
    61. Ferreira, Miguel A. & Matos, Pedro, 2008. "The colors of investors' money: The role of institutional investors around the world," Journal of Financial Economics, Elsevier, vol. 88(3), pages 499-533, June.
    62. Aggarwal, Reena & Klapper, Leora & Wysocki, Peter D., 2005. "Portfolio preferences of foreign institutional investors," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2919-2946, December.
    63. Pesenti, Paolo & van Wincoop, Eric, 2002. "Can Nontradables Generate Substantial Home Bias?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 25-50, February.
    64. Anil Mishra, 2011. "Australia’s equity home bias and real exchange rate volatility," Review of Quantitative Finance and Accounting, Springer, vol. 37(2), pages 223-244, August.
    65. Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, June.
    66. Li, Kai, 2004. "Confidence in the Familiar: An International Perspective," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(1), pages 47-68, March.
    67. Chan, Louis K C & Karceski, Jason & Lakonishok, Josef, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 937-974.
    68. Asgharian, Hossein & Hansson, Bjorn, 2006. "Home bias among European investors from a Bayesian perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(5), pages 397-410, December.
    69. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 37-53.
    70. Zellner, Arnold, 2010. "Bayesian shrinkage estimates and forecasts of individual and total or aggregate outcomes," Economic Modelling, Elsevier, vol. 27(6), pages 1392-1397, November.
    71. Bruno Solnik & Luo Zuo, 2012. "A Global Equilibrium Asset Pricing Model with Home Preference," Management Science, INFORMS, vol. 58(2), pages 273-292, February.
    72. Bruno Solnik & Luo Zuo, 2012. "A Global Equilibrium Asset Pricing Model with Home Preference," Post-Print hal-00679667, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adrian Gepp & Geoff Harris & Bruce Vanstone, 2020. "Financial applications of semidefinite programming: a review and call for interdisciplinary research," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3527-3555, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anil V. Mishra, 2017. "Foreign bias in Australia's international equity holdings," Review of Financial Economics, John Wiley & Sons, vol. 33(1), pages 41-54, April.
    2. Mishra, Anil V., 2015. "Measures of equity home bias puzzle," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 293-312.
    3. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    4. Anil Mishra, 2011. "Australia’s equity home bias and real exchange rate volatility," Review of Quantitative Finance and Accounting, Springer, vol. 37(2), pages 223-244, August.
    5. Eduard Gaar & David Scherer & Dirk Schiereck, 2022. "The home bias and the local bias: A survey," Management Review Quarterly, Springer, vol. 72(1), pages 21-57, February.
    6. Mishra, Anil V. & Ratti, Ronald A., 2013. "Home bias and cross border taxation," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 169-193.
    7. Lee, Junyong & Lee, Kyounghun & Oh, Frederick Dongchuhl, 2023. "International portfolio diversification and the home bias puzzle," Research in International Business and Finance, Elsevier, vol. 64(C).
    8. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    9. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    10. repec:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    11. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    12. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.
    13. Jordi Mondria & Thomas Wu, 2013. "Imperfect financial integration and asymmetric information: competing explanations of the home bias puzzle?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(1), pages 310-337, February.
    14. Nicolas Coeurdacier & Hélène Rey, 2010. "Home bias in open economy financial macroeconomics," SciencePo Working papers hal-01069440, HAL.
    15. Giofré, Maela, 2014. "Domestic investor protection and foreign portfolio investment," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 355-371.
    16. Daly, Kevin & Vo, Xuan Vinh, 2013. "The determinants of home bias puzzle in equity portfolio investment in Australia," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 34-42.
    17. repec:spo:wpmain:info:hdl:2441/1shj1p7td8e0r5c9fcsnk8a91 is not listed on IDEAS
    18. Mishra, Anil V., 2014. "Australia's home bias and cross border taxation," Global Finance Journal, Elsevier, vol. 25(2), pages 108-123.
    19. repec:hal:spmain:info:hdl:2441/1shj1p7td8e0r5c9fcsnk8a91 is not listed on IDEAS
    20. Jonathan Batten & Xuan Vinh Vo, 2010. "The determinates of equity portfolio holdings," Applied Financial Economics, Taylor & Francis Journals, vol. 20(14), pages 1125-1132.
    21. Hamberg, Mattias & Mavruk, Taylan & Sjögren, Stefan, 2013. "Investment allocation decisions, home bias and the mandatory IFRS adoption," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 107-130.
    22. Baele, Lieven & Pungulescu, Crina & Ter Horst, Jenke, 2007. "Model uncertainty, financial market integration and the home bias puzzle," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 606-630, June.
    23. Diyarbakirlioglu, Erkin, 2011. "Domestic and foreign country bias in international equity portfolios," Journal of Multinational Financial Management, Elsevier, vol. 21(5), pages 301-329.
    24. Socaciu, Erzsébet-Mirjám & Nagy, Bálint-Zsolt & Benedek, Botond, 2023. "No place like home: Home bias and flight-to-quality in Group of Seven countries," Economic Modelling, Elsevier, vol. 129(C).
    25. Giofré, Maela, 2017. "Financial education, investor protection and international portfolio diversification," Journal of International Money and Finance, Elsevier, vol. 71(C), pages 111-139.
    26. Drobetz, Wolfgang & Mönkemeyer, Marwin & Requejo, Ignacio & Schröder, Henning, 2023. "Foreign bias in institutional portfolio allocation: The role of social trust," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 233-269.

    More about this item

    Keywords

    Mutual Fund; Foreign Bias; Mean-Variance; Minimum Variance; Bayes-Stein; Bayesian; Multi-Prior.;
    All these keywords.

    JEL classification:

    • F39 - International Economics - - International Finance - - - Other
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:63376. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.