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Impact of culture and patriotism on home bias in bond portfolios

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Abstract

Extant research has documented a substantial impact of culture and patriotism on equity home bias. This paper examines whether culture and patriotism influence home bias in bond portfolios. In this respect, I differentiate between two different aspects of home bias: domestic bias (overinvestment in domestic debt securities) and foreign bias (over- or underinvestment in debt securities issued by different host countries). The analysis uses the Coordinated Portfolio Investment Survey data over the 2004–2012 period and relies on extensive robustness checks based on four internationally recognized cross-cultural research projects: the GLOBE study of House et al. (Culture, leadership, and organizations: the GLOBE study of 62 societies, Sage Publications, Thousand Oaks, 2004), the “Cultures and Organizations” of Hofstede et al. (Cultures and organizations: software of the mind, 3rd edn, McGraw-Hill, New York, 2010), the International Social Survey Program, and the World Values Survey. There is strong evidence that patriotism deters foreign investment and increases overinvestment in domestic bonds. Investors from countries with higher levels of uncertainty avoidance invest less in foreign debt markets.

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Notes

  1. For instance, governments frequently appeal to the patriotic feeling of the citizens to promote the sovereign debt issuances. The “Patriot Bonds” of the US government is one example of a successful patriotic promotion of sovereign bonds (Morse and Shive 2011).

  2. If uncertainty avoidance reflected only risk aversion, its impact on home bias would be ambiguous. It would, indeed, be positive for investors from home countries with less risky bonds. By contrast, an investor located in a country with comparatively risky bonds would be unwilling to invest much of his wealth in domestic bonds and, instead, reduce risk by international diversification. In this case, the impact of uncertainty avoidance on home bias would be negative.

  3. These dimensions are power distance, masculinity, individualism, and uncertainty avoidance. Indulgence and long-term orientation are not included since these scores are not available for several countries in my sample.

  4. Results on the Hausman and Sargan-Hansen tests are available on demand.

  5. A comparable cross-sectional estimation for domestic bias is not possible due to a low number of sample countries: It would result in a regression model with 15 regressors and only 39 observations.

  6. The correlation between the uncertainty avoidance scores of Hofstede et al. (2010) and the GLOBE study amounts to 0.34 for the sample countries.

  7. The impact of the individualism scores of Hofstede et al. (2010) is substantially lower for domestic bond bias compared to the results of Anderson et al. (2011) for domestic equity bias.

  8. Columns (4) and (6) of Table 7 show that the coefficient estimate on the WVS patriotism looses more than half of its value when the GLOBE cultural variables instead of the cultural variables of Hofstede et al. (2010) are used. One potential explanation may be collinearity: Table 3 shows that cultural distance, uncertainty avoidance, and the institutional collectivism of the GLOBE study are more strongly correlated with the WVS patriotism than the corresponding cultural variables of Hofstede et al. (2010).

  9. Given that the sample mean of the actual portfolio weight amounts to 0.66 %, the economic impact of uncertainty avoidance on the actual portfolio weight is still considerable.

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Acknowledgments

I thank the anonymous referees for the helpful comments.

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Correspondence to Elina Pradkhan.

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Pradkhan, E. Impact of culture and patriotism on home bias in bond portfolios. Rev Manag Sci 10, 265–301 (2016). https://doi.org/10.1007/s11846-014-0146-4

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