Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/106640
Authors: 
Erdogan, Burcu
Year of Publication: 
2014
Series/Report no.: 
Research Papers in Economics 15/14
Abstract: 
In this paper, I explore the determinants of foreign bias in international portfolio investment focusing on a behavioral explanation. Specifically, I investigate whether investors having a stronger uncertainty aversion perceive a foreign country to be more unfamiliar than those with less such aversion. I exploit systematic differences in uncertainty avoidance across countries in my analysis using Hofstede's (1980, 2001) findings for this purpose. I show that less familiarity with the foreign markets discourages investors from investing abroad and that this effect is more pronounced the more uncertainty averse the investor, even after controlling for different sources of risk. I provide compelling evidence that uncertainty avoidance helps to explain foreign bias and that it has an amplifying effect on unfamiliarity and should be accounted for when modeling portfolio choices.
Subjects: 
foreign bias
home bias
international portfolio investment
uncertainty avoidance
JEL: 
F30
G11
G15
Z13
Document Type: 
Working Paper

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