ABSTRACT
Our final two proxies argue prominent role in explaining the degree of bias. As evidenced by Chan, Covrig, and Ng (2005), a shared official language and geographic proximity are both related to foreign bias and are thus included in all specifications – both of these variables are sourced from the GeoDist Database (Mayer and Zignago 2011). In a related manner, following Beugelsdijk and Frijns (2010) we also control for possible regional effects between the investor and recipient countries. We do this by constructing a dummy variable taking the value of one, if both countries are members of either the European Union, NAFTA, or ASEAN. To further investigate the possible impact of familiarity on international asset allocation, we include a dummy variable equal to one, if the legal frameworks of the investor and recipient countries are of the same origin (classifications are obtained from La Porta et al. 1999). We also estimate the degree of correlation between investor and recipient country returns, to measure the diversification potential of the latter. The correlations are computed using monthly returns over a five-year period. Lastly, we use the cultural distance in each investor-recipient country pair, which is computed in the same way as in Kogut and Singh (1988).
