The Home Bias Puzzle in Equity Portfolios


in International Finance

Published in print December 2012 | ISBN: 9780199754656
Published online May 2013 | e-ISBN: 9780199979462 | DOI:
The Home Bias Puzzle in Equity Portfolios

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This chapter reviews the recent literature on equity home bias and shows that people overinvest in domestic stocks relative to the theoretically optimal investment portfolio. The chapter examines different home bias measures and illustrates the extent and the evolution of equity home bias both with recent portfolio holdings data and longer time-series. Institutional-based and behavior-based explanations for the puzzle are considered and discussed. The chapter concludes that none of the proposed theories can explain the full extent of the bias by itself. International portfolio choice might very well be caused by a mixture of rational and irrational factors.

Keywords: home bias; international portfolio diversification; investment costs; information effects

Chapter.  8529 words.  Illustrated.

Subjects: Financial Markets

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