Home Bias and Performance and Risk in Islamic Mutual Funds
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Abstract
This paper examines the effects of home bias on Islamic mutual fund (IMF) performance and risk measures, testing the Information Advantage versus Diversification Cost trade-off in 691 IMFs. Results for the full sample reveal home bias is a risk-shifting strategy: managers reduce systematic risk but significantly increase idiosyncratic risk. While this generates skill, the benefits fail to translate into consistent net risk-adjusted returns. Critically, subsample analysis finds that home bias in mature IMPS markets (Indonesia, Malaysia, Pakistan, Saudi Arabia) is not beneficial; it is associated with significant underperformance and a higher systematic risk profile. Furthermore, the risks are non-linear: above-median home bias adds significant volatility with no additional reward. The findings demonstrate home bias is a sub-optimal strategy, especially in core Islamic markets.
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