Home bias and high turnover reconsidered
It is a stylized fact of international finance that foreign equities are underweighted (the home bias) but overtraded (the high turnover). Since stylized facts drive research, theoretical models are now developed to explain the puzzling coexistence of home bias and high turnover, first presented in Tesar and Werner (1995), and researchers now dismiss transaction costs as a plausible explanation of home bias. I show, however, that part of the puzzle--very high turnover rates on foreign equity portfolios--is based on inaccurate estimates of cross-border holdings. Revised estimates of holdings of foreign equities from comprehensive benchmark surveys produce foreign turnover rates that are much lower than previously reported and are comparable to domestic turnover rates. The implications of this finding are clear. First, researchers should no longer develop theoretical models to explain the coexistence of home bias and high turnover. Second, the relationship between transaction costs and home bias should be reexplored. On the second point, the basic intuition from Tesar and Werner (1995)--that transaction costs do not help explain the observed home bias--is confirmed using actual data on transaction costs in 41 markets.
|Date of creation:||2001|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/ifdp/order.htm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
- Rowland, Patrick F., 1999. "Transaction costs and international portfolio diversification," Journal of International Economics, Elsevier, vol. 49(1), pages 145-170, October.
- Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
- Alaganar, V. T. & Bhar, Ramaprasad, 2001. "Diversification gains from American depositary receipts and foreign equities: evidence from Australian stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 97-113, March.
- Kang, Jun-Koo & Stulz, Rene M., 1997.
"Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan,"
Journal of Financial Economics,
Elsevier, vol. 46(1), pages 3-28, October.
- Jun-Koo Kang & Rene M. Stulz, 1995. "Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan," NBER Working Papers 5166, National Bureau of Economic Research, Inc.
- Martin, Philippe & Rey, Hélène, 1999.
"Financial Integration and Asset Returns,"
CEPR Discussion Papers
2282, C.E.P.R. Discussion Papers.
- Philippe Martin & Helene Rey, 2000. "Financial integration and asset returns," LSE Research Online Documents on Economics 20201, London School of Economics and Political Science, LSE Library.
- P Martin & H Rey, 2000. "Financial Integration and Asset Returns," CEP Discussion Papers dp0451, Centre for Economic Performance, LSE.
- Brennan, Michael J & Cao, H Henry, 1997.
" International Portfolio Investment Flows,"
Journal of Finance,
American Finance Association, vol. 52(5), pages 1851-80, December.
- Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000.
"Information costs and home bias: an analysis of U.S. holdings of foreign equities,"
International Finance Discussion Papers
691, Board of Governors of the Federal Reserve System (U.S.).
- Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004. "Information costs and home bias: an analysis of US holdings of foreign equities," Journal of International Economics, Elsevier, vol. 62(2), pages 313-336, March.
- Massimo Guidolin, 2005.
"Home bias and high turnover in an overlapping generations model with learning,"
2005-012, Federal Reserve Bank of St. Louis.
- Massimo Guidolin, 2005. "Home Bias and High Turnover in an Overlapping-generations Model with Learning," Review of International Economics, Wiley Blackwell, vol. 13(4), pages 725-756, 09.
When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:702. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs)
If references are entirely missing, you can add them using this form.