Title: The equity home bias puzzle: A survey
Authors: Cooper, Ian ×
Sercu, Piet
Vanpée, Rosanne #
Issue Date: 2013
Publisher: Now Publishers Inc.
Series Title: Foundations and Trends in Finance vol:7 issue:4 pages:289-416
Abstract: Home bias – the empirical phenomenon that investors assign anomalously high weights to their own domestic assets – has puzzled academics for decades: financial theory predicts that an internationally well diversified portfolio of stocks and short-term bonds can reduce risk significantly without affecting expected return. Although the globalization of international equity markets has increased international investments, equity portfolios remain severely home biased today, and no single explanation seems to solve the puzzle completely. In this paper, we first provide a thorough description of the equity home bias phenomenon by defining, discussing, and applying the competing measures and presenting some estimates of the costs of under–diversification. Second, we evaluate the explanations for the equity home bias proposed in the literature such as information asymmetries, behavioral aspects, barriers to foreign investment, and governance issues, and conclude that each explanation on its own falls short, suggesting that the equity home bias probably reflects a combination of factors. Lastly, we review the implications of international under–diversification for portfolio formation and the cost of capital of companies.
ISSN: 1567-2395
VABB publication type: VABB-1
Publication status: published
KU Leuven publication type: IT
Appears in Collections:Research Center International Finance, Leuven
Faculty of Economics and Business (FEB) - miscellaneous
Research Centre for Finance, Accountancy & Tax, Campus Brussels (-)
× corresponding author
# (joint) last author

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