Determinants of foreign and domestic investment bias in global bond markets: Some empirical evidence

In this paper, we define foreign (domestic) bias as the deviation of foreign (domestic) investors' actual portfolio allocation in a bond market from the same bond market's weight in global bond market. We investigate the determinants of foreign and domestic investment bias in 41 global bond markets. Our evidence indicates that foreign investors significantly overweigh markets that offer better risk-return profiles. Such return driven behavior of foreign investors is especially pronounced in emerging bond markets. Foreign investors are also found to avoid volatility in highly controlled bond markets. Our evidence sheds some light on the importance of improving investor profile in emerging markets.