Measures of Equity Home Bias Puzzle

The paper develops measures of home bias for 48 countries over the period 2001 to 2011 by employing various models: International Capital Asset Pricing Model (ICAPM), Mean-Variance, Minimum-Variance, Bayes-Stein, Bayesian and Multi-Prior. ICAPM country portfolio weights are computed relative to world market capitalization. Bayesian models allow for various degrees of mis-trust in the ICAPM model. Multi-Prior restricts the expected return for each asset to lie within specified confidence interval around its estimated value. Mean-Variance computes optimal weights by sample estimates of mean and covariance matrix of sample return. Bayes-Stein shrinks each asset’s historical mean return toward the return of the Minimum Variance Portfolio and improves precision associated with estimating the expected return of each asset. The paper finds that foreign listing, idiosyncratic risk, beta, inflation, natural resources rents, size, global financial crisis and institutional quality has significant impact on home bias. There are policy implications associated with home bias.