Determinants of home bias and foreign bias in the global portfolio investment of selected OIC countries

Abstract

Home bias reflects the propensity of investors to invest substantially in domestic market. Whilst when investing abroad investors exhibit foreign bias, a tendency to overweight certain foreign market based on their preference. The existence of both home bias and foreign bias offers a discovery of new dimension that enables for a comprehensive and robust investigation of such phenomena. Therefore, the main agenda of this research is to examines the determinants of home bias and foreign bias in the global portfolio investment of selected OIC countries. In addition, this study also aims to evaluate the relationship between home bias and foreign bias. An unbalanced bilateral panel data of 12 OIC countries’ outward equity investment in 74 host countries from year 2001 to 2016 is analysed. The samples observed are based on the composition of host countries that are represented by global, intra-OIC, and non-OIC samples. Cross-sectional analysis shows OIC countries display higher home bias towards non-OIC countries, although these countries are having higher level financial market openness, institutional qualities, economic development, market development, and higher access to information and communication channel, as compared to their OIC counterparts. Although the home bias occurrence is more prominent than foreign bias, the magnitude of foreign bias is more dominant than home bias. OIC countries exhibit higher foreign bias towards their OIC counterparts especially in MENA region. The results suggest, OIC countries not only exhibit foreign bias but also demonstrate regional bias. In the context of global portfolio investment of OIC countries, this geographical preference has resulted in foreign bias dominates home bias phenomena. System Generalized Method of Moments (GMM) estimator is employed to determine factors influencing home bias and foreign bias. The findings show home bias can be explained by factors related to institutional quality, familiarity, and global financial crisis. On the other hand, foreign bias can be explained by factors related to financial market openness, familiarity, information asymmetry, and global financial crisis. The relative factors introduced in the current study significantly explained the existence of home bias and foreign bias phenomena. Furthermore, a complementary relationship between home bias and foreign bias is also found. In addition, factors related to familiarity and global financial crisis support complementary relationship that exists between home bias and foreign bias. Summative findings indicate home bias may discourage global portfolio investment, while foreign bias may encourage the global portfolio investment of OIC countries. This study has a significant implication to the investors, fund managers and the regulators of the OIC countries. Investors and fund manager in OIC countries should be aware on the existence of home bias and foreign bias in their global portfolio investment that may potentially reduce the benefits of optimal diversification. It is a call for policy makers in the OIC countries to convince their local investors that international portfolio diversifications enable to minimize portfolio’s risk and eventually increase the investment returns. In addition, policy makers in OIC countries need to design a comprehensive investment agreement to attract active participation and inter-regional investments among OIC countries.