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Home-field advantage or a matter of ambiguity aversion? Local bias among German individual investors

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  • Markus Baltzer
  • Oscar Stolper
  • Andreas Walter

Abstract

This paper investigates whether familiarity induced by ambiguity aversion can help explaining the local bias phenomenon among individual investors. Using geographic closeness as a proxy for investor familiarity, we find that investors pull out of (unfamiliar) remote stocks and pour into (familiar) local stocks during times of increased market uncertainty. Moreover, the magnitude of this 'flight to familiarity' increases in the spread of an investor's ambiguity (about expected returns) between local and remote stocks. Our results prove robust to a number of alternative explanations of local bias. Specifically, we rule out a 'home-field advantage', where investors are able to translate information advantages about nearby companies into excess returns on their local stockholdings. We conclude that individual investors' local bias is induced by ambiguity aversion in the portfolio selection process rather than a trading strategy based on superior information about local companies.

Suggested Citation

  • Markus Baltzer & Oscar Stolper & Andreas Walter, 2015. "Home-field advantage or a matter of ambiguity aversion? Local bias among German individual investors," The European Journal of Finance, Taylor & Francis Journals, vol. 21(9), pages 734-754, July.
    • Handle: RePEc:taf:eurjfi:v:21:y:2015:i:9:p:734-754
    DOI: 10.1080/1351847X.2013.877514
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    Citations

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    Cited by:

    1. Tim Schmitz & Ingo Hoffmann, 2020. "Re-evaluating cryptocurrencies' contribution to portfolio diversification -- A portfolio analysis with special focus on German investors," Papers 2006.06237, arXiv.org, revised Aug 2020.
    2. Matthias Horn & Andreas Oehler, 2020. "Automated portfolio rebalancing: Automatic erosion of investment performance?," Journal of Asset Management, Palgrave Macmillan, vol. 21(6), pages 489-505, October.
    3. Junyong Lee & Kyounghun Lee & Frederick Dongchuhl Oh, 2023. "Religion and Equity Home Bias," Open Economies Review, Springer, vol. 34(5), pages 1015-1038, November.
    4. Oehler, Andreas & Horn, Matthias & Wendt, Stefan, 2016. "Benefits from social trading? Empirical evidence for certificates on wikifolios," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 202-210.
    5. Andreas Oehler & Matthias Horn, 2021. "Behavioural portfolio theory revisited: lessons learned from the field," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 1743-1774, April.
    6. Koen Schoors & Maria Semenova & Andrey Zubanov, 2016. "Depositor Discipline in Russian Regions: Flight to Familiarity or Trust in Local Authorities?," HSE Working papers WP BRP 58/FE/2016, National Research University Higher School of Economics.
    7. Schoors, Koen & Semenova, Maria & Zubanov, Andrey, 2019. "Depositor discipline during crisis: Flight to familiarity or trust in local authorities?," Journal of Financial Stability, Elsevier, vol. 43(C), pages 25-39.
    8. Lars Hornuf & Matthias Neuenkirch, 2017. "Pricing shares in equity crowdfunding," Small Business Economics, Springer, vol. 48(4), pages 795-811, April.
    9. Dlugosch, Dennis & Horn, Kristian & Wang, Mei, 2023. "New experimental evidence on the relationship between home bias, ambiguity aversion and familiarity heuristics," Journal of Economics and Business, Elsevier, vol. 125.
    10. Gerlinde Behrendt & Sarah Peter & Simone Sterly & Anna Maria Häring, 2022. "Community financing for sustainable food and farming: a proximity perspective," Agriculture and Human Values, Springer;The Agriculture, Food, & Human Values Society (AFHVS), vol. 39(3), pages 1063-1075, September.
    11. Shao, Ran & Wang, Na, 2021. "Trust and local bias of individual investors," Journal of Banking & Finance, Elsevier, vol. 133(C).
    12. Qian Chen & Xiang Gao & Jianming Mo & Zhouling Xu, 2022. "Market Reaction to Local Attention around Earnings Announcements in China: Evidence from Internet Search Activity," IJFS, MDPI, vol. 10(4), pages 1-26, October.
    13. Andreas Oehler & Julian Schneider, 2022. "Gambling with lottery stocks?," Journal of Asset Management, Palgrave Macmillan, vol. 23(6), pages 477-503, October.
    14. Lee, Junyong & Lee, Kyounghun & Oh, Frederick Dongchuhl, 2023. "International portfolio diversification and the home bias puzzle," Research in International Business and Finance, Elsevier, vol. 64(C).

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