Working Paper: NBER ID: w12220
Authors: Fang Cai; Francis E. Warnock
Abstract: It is an established fact that investors favor the familiar—be it domestic securities or, within a country, the securities of nearby firms—and avoid investments that would provide the greatest diversification benefits. While we do not rule out familiarity as an important driver of portfolio allocations, we provide new evidence of investors' international diversification motive. In particular, our analysis of the security-level U.S. equity holdings of foreign and domestic institutional investors indicates that institutional investors reveal a preference for domestic multinationals (MNCs), even after controlling for familiarity factors. We attribute this revealed preference to the desire to obtain "safe" international diversification. We then show that holdings of domestic MNCs are substantial and, after accounting for this home-grown foreign exposure, that the share of "foreign" equities in investors' portfolios roughly doubles, reducing (but not eliminating) the observed home bias.
Keywords: No keywords provided
JEL Codes: G11; G15; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic Institutional Investors' Preference for Domestic MNCs (F23) | Greater International Diversification Benefits (F29) |
| Domestic MNCs (F23) | Homegrown Foreign Exposure (F29) |
| Homegrown Foreign Exposure (F29) | Reduced Home Bias (F29) |
| Controlling for Familiarity Factors (C92) | Revealed Preference for Domestic MNCs (F23) |
| Home Bias Puzzle (F14) | Overstated (Y60) |