Authors: David Schumacher
Publication: Review of Financial Studies, Forthcoming
In their foreign portfolio allocations, international mutual funds overweight industries that are comparatively large in their domestic stock market. Aggregate excess foreign industry allocations are sizeable, on average amounting to over 100% for the largest domestic industries. While this foreign industry bias partly reflects familiarity-based motives, a large body of evidence on investment and performance patterns is on the whole remarkably consistent with a specialized learning motive contributing to the bias. This suggests that differences in industry structures across domestic stock markets proxy for international information asymmetries.
Read full article: Review of Financial Studies