The Determinants of Home Bias in Stock Portfolio: An Emerging and Developed Markets Study

TL;DR

This study measures home bias in stock portfolios across 20 countries from 2008 to 2013, identifying key factors influencing it and highlighting differences between emerging and developed markets.

Contribution

It provides a comparative analysis of home bias determinants in emerging versus developed markets using cross-country econometric models.

Findings

High levels of home bias observed across all countries.

Exchange rate volatility significantly affects emerging markets' home bias.

Factors like co-variance, size, distance, language, legal framework, and foreign stocks influence investment abroad.

Abstract

The objective of this paper is to measure the degree of home bias (HB) within holdings portfolio and to identify their determining factors. By following literature and an international capital asset pricing model, we have chosen quite a number of susceptible factors that impact HB. This model is, hence, estimated for 20 countries, with cross-section econometrics, between 2008 and 2013. Our results show that all countries have recorded a high level of HB in their holdings portfolio. After that, we test if the HB of the emerging markets and that of the developed markets react differently to the determining factors. The volatility of the exchange rate is statistically significant with emerging markets, while it is hardly remarkable for the developed countries. Co-variance, size, distance, language, legal framework and foreign organization stocks prevents American investors to invest abroad.