Foreign bias in Australian-domiciled mutual fund holdings

• The paper develops foreign equity bias measures for 1414 Australian domiciled mutual funds.
• Bayesian foreign equity bias measures allow for various degrees of mis-trust in the ICAPM.
• Multi-prior foreign equity bias measures take into account investors ambiguity aversion.
• The paper investigates various plausible sources of foreign equity bias.

The paper employs International Capital Asset Pricing (ICAPM), Mean-variance, Global minimum variance, Bayes–Stein, Bayesian and Multi-prior models to develop foreign equity bias measures for 1414 Australian domiciled mutual funds, which invest in 41 countries worldwide. The Bayesian foreign equity measures, which take into account various degrees of mistrust in ICAPM, suggest that Australian domiciled mutual funds prefer investing in US, UK, Japan, France and Germany. The plausible sources of foreign equity bias are found to be GDP per capita, GDP growth rate, exchange rate volatility, tax, stock market development, familiarity, institution and stock characteristic variables.