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Equity Home Bias: A Review Essay

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  • Kavous Ardalan

Abstract

This paper reviews the relatively more recent literature on equity home bias – the empirical finding that people overinvest in domestic stocks relative to the optimal investment portfolio implied by the modern portfolio theory. It reviews six broad classes of explanation of this puzzling phenomenon: (1) hedging home risks; (2) barriers to foreign investments; (3) information asymmetries; and (4) behavioral factors. The consensus is that none of the explanations can account for the full extent of the bias by itself, thus the home bias should be explained by a combination of rational and behavioral factors.

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  • Kavous Ardalan, 2019. "Equity Home Bias: A Review Essay," Journal of Economic Surveys, Wiley Blackwell, vol. 33(3), pages 949-967, July.
    • Handle: RePEc:bla:jecsur:v:33:y:2019:i:3:p:949-967
    DOI: 10.1111/joes.12302
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    Cited by:

    1. Malmendier, Ulrike & Pouzo, Demian & Vanasco, Victoria, 2020. "Investor experiences and international capital flows," Journal of International Economics, Elsevier, vol. 124(C).
    2. McDowell, Shaun & Lee, John B. & Marsden, Alastair, 2020. "The potential effect of taxes on the equity home bias in New Zealand PIEs," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    3. Galvani, Valentina, 2022. "Country-Based Investing with Exchange Rate and Reserve Currency," Working Papers 2022-5, University of Alberta, Department of Economics.
    4. Curatola, Giuliano & Dergunov, Ilya, 2023. "International capital markets with interdependent preferences: Theory and empirical evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 403-421.
    5. Drobetz, Wolfgang & Mönkemeyer, Marwin & Requejo, Ignacio & Schröder, Henning, 2023. "Foreign bias in institutional portfolio allocation: The role of social trust," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 233-269.
    6. Socaciu, Erzsébet-Mirjám & Nagy, Bálint-Zsolt & Benedek, Botond, 2023. "No place like home: Home bias and flight-to-quality in Group of Seven countries," Economic Modelling, Elsevier, vol. 129(C).
    7. Sanggyu Kang & Chune Young Chung & Amirhossein Fard, 2024. "Does geographic or market proximity matter? Evidence from institutional investor monitoring on earnings attributes in US cross‐listed stocks," Bulletin of Economic Research, Wiley Blackwell, vol. 76(2), pages 443-469, April.
    8. 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.
    9. Kong, Dongmin & Zhao, Zhao, 2024. "Overseas exposures, global events, and mutual fund performance," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 848-863.
    10. Lu, Xiaomeng & Zhang, Xianjun & Guo, Jiaojiao & Yue, Pengpeng, 2024. "Digital finance era: Will individual investors become better players?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    11. Liang, Quanxi & Jin, Qi & Lu, Meiting & Shan, Yaowen, 2023. "When school ties meet geography: Education-province bias in mutual fund portfolios," Journal of Banking & Finance, Elsevier, vol. 157(C).
    12. Gossé, Jean-Baptiste & Jehle, Camille, 2024. "Benefits of diversification in EU capital markets: Evidence from stock portfolios," Economic Modelling, Elsevier, vol. 135(C).
    13. Mohammed Bouaddi & Khouzeima Moutanabbir, 2022. "Systematic extreme potential gain and loss spillover across countries," Risk Management, Palgrave Macmillan, vol. 24(4), pages 327-366, December.
    14. Fujiwara, Kenji, 2021. "Strategic investment and industry location in a footloose capital model of economic geography," Economics Letters, Elsevier, vol. 203(C).
    15. Chung, Chune Young & Sul, Hong Kee & Wang, Kainan, 2021. "A tale of two forms of proximity: Geography and market," Journal of Business Research, Elsevier, vol. 122(C), pages 14-23.
    16. Hai Long Vo & Duc Hong Vo, 2023. "The purchasing power parity and exchange‐rate economics half a century on," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 446-479, April.
    17. Do, Hung X. & Nguyen, Nhut H. & Nguyen, Quan M.P., 2022. "Multinationals and stock return comovement," Global Finance Journal, Elsevier, vol. 52(C).
    18. Wang, Weishen, 2020. "Shanghai-Hong Kong Stock Exchange Connect Program: A story of two markets and different groups of stocks," Journal of Multinational Financial Management, Elsevier, vol. 55(C).
    19. Giuseppe Pulina & Skerdilajda Zanaj, 2022. "Tax competition and phantom FDI," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1342-1363, December.
    20. Rifa Atrous & Ezzeddine Abaoub, 2024. "The Home Bias: Evolution, Determinants, and Financial Crises," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 16(7), pages 1-60, July.
    21. 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).
    22. Eduard Gaar & David Scherer & Dirk Schiereck, 2022. "The home bias and the local bias: A survey," Management Review Quarterly, Springer, vol. 72(1), pages 21-57, February.
    23. R. Balasubramanian & Brajesh Kumar, 2023. "Equity Home Bias in Emerging and Advanced Economies: Trend Before and During COVID-19," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 29(4), pages 261-275, November.
    24. Junyong Lee & Kyounghun Lee & Frederick Dongchuhl Oh, 2023. "Religion and Equity Home Bias," Open Economies Review, Springer, vol. 34(5), pages 1015-1038, November.

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