The Determinants Of Home Bias Puzzle In Equity Portfolio Investment In Australia
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| Author | : Xuan Vinh Vo |
| Publisher | : |
| Total Pages | : 34 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
Over the past decades, there is an increased trend in the international financial integration as countries are removing and relaxing controls on cross-border investment. Capital can flow easily to the destination that offers higher returns as the results of decreasing obstacles to international investment. However, despite well documented gains from international diversification, investors continue to have a strong preference for domestic assets. This paper characterizes the salient nature of the composition of the Australian equity portfolio investment. In addition, the paper investigates the determinants of the Australian investors' home bias in equity portfolio investment. Employing the disaggregated data for the holding of Australian investors abroad from the Coordinated Portfolio Investment Survey (CPIS) conducted by IMF for the year 1997, 2001, 2002, 2003, 2004 and 2005, we provide an insight into the causes of the home bias puzzle by empirically analysing the role of explicit barriers to international investment (capital controls and transaction costs) and implicit barriers (governance and information asymmetries).
| Author | : Ian Cooper |
| Publisher | : |
| Total Pages | : 133 |
| Release | : 2013 |
| Genre | : International finance |
| ISBN | : 9781601987631 |
Home bias - the empirical phenomenon that investors assign anomalously high weights to their own domestic assets - has puzzled academics for decades: financial theory predicts that an internationally well diversified portfolio of stocks and short-term bonds can reduce risk significantly without affecting expected return. Although the globalization of international equity markets has increased international investments, equity portfolios remain severely home biased today, and no single explanation seems to solve the puzzle completely. In this paper, we first provide a thorough description of the equity home bias phenomenon by defining, discussing, and applying the competing measures and presenting some estimates of the costs of under-diversification. Second, we evaluate the explanations for the equity home bias proposed in the literature such as information asymmetries, behavioral aspects, barriers to foreign investment, and governance issues, and conclude that each explanation on its own falls short, suggesting that the equity home bias probably reflects a combination of factors. Lastly, we review the implications of international under-diversification for portfolio formation and the cost of capital of companies.
| Author | : Shujing Li |
| Publisher | : International Monetary Fund |
| Total Pages | : 32 |
| Release | : 2004-02 |
| Genre | : Business & Economics |
| ISBN | : |
Despite the liberalization of foreign portfolio investment around the globe since the early 1980s, the home-bias phenomenon is still found to exist. Using a relatively new IMF survey dataset of cross-border equity holdings, this paper tests new structural equations from a consumption-based asset-pricing model on international portfolio holdings. Using of stock data allows us to provide new and clear-cut evidence on the determinants of international portfolio holdings. The empirical results show that an augmented gravity model performs remarkably well. The results indicate that market size, transaction cost, and information asymmetry are major determinants of cross-border portfolio choice. These findings shed light on alternative theories of international portfolio holdings, especially on the transaction and information cost-based explanations of home bias.
| Author | : Kavous Ardalan |
| Publisher | : Routledge |
| Total Pages | : 362 |
| Release | : 2019-05-17 |
| Genre | : Business & Economics |
| ISBN | : 1000008274 |
This book provides a comprehensive and critical analysis of research outcomes on the equity home bias puzzle – that people overinvest in domestic stocks relative to the theoretically optimal investment portfolio. It introduces place attachment – the bonding that occurs between individuals and their meaningful environments – as a new explanation for equity home bias, and presents a philosophically multi-paradigmatic view of place attachment. For the first time, a comprehensive and up-to-date review of the extant literature is provided, demonstrating that place attachment is a contributing factor to 22 different topics in which variations of home bias are present. The author also analyses the social-psychological underpinnings of place attachment, and considers the effect of multi-culturalism on the future of equity home bias. The book’s unique approach discusses the issues in conceptual terms rather than through data and statistical methods. This multi- and inter-disciplinary book is an invaluable resource for graduate students and researchers interested in economics, finance, philosophy, and/or methodology, introducing them to a new line of research.
| Author | : Ted Lindblom |
| Publisher | : Springer |
| Total Pages | : 290 |
| Release | : 2017-08-06 |
| Genre | : Business & Economics |
| ISBN | : 3319547623 |
This book helps readers understand the widely documented distortion in the portfolio choice of individual investors toward proximate firms – the proximity bias phenomenon. First, it recapitulates the fundamentals of modern portfolio theory. It then goes on to describe and demonstrate different approaches on how to measure proximity bias and identifies and examines potential motives and reasons for such a bias. In addition, the book presents new analysis on the financial effects of individual investors’ proximity bias, explaining and contributing with possible policy implications on their portfolio distortion. This book will be of interest to students and researchers, as well as decision-makers in business firms and households.
| Author | : Richard Portes |
| Publisher | : |
| Total Pages | : 60 |
| Release | : 2000 |
| Genre | : Capital movements |
| ISBN | : |
We apply a new approach to a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96. The model integrates elements of the finance literature on portfolio composition and the international macroeconomics and asset trade literature. Gross asset flows depend on market size in both source and destination country as well as trading costs, in which both information and the transaction technology play a role. Distance proxies some information costs, and other variables explicitly represent information transmission, an information asymmetry between domestic and foreign investors, and the efficiency of transactions. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information is the main determinant of the pattern of international transactions, while there is little support in our data for diversification and return-chasing motives for transactions."--Authors.
| Author | : Chenyue Hu |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2022 |
| Genre | : |
| ISBN | : |
This paper examines the well-known equity home bias puzzle in international macroeconomics by exploiting the cross-sector variation. Combining unique financial datasets, I introduce a novel sectoral home bias index that covers 27 industries in 43 countries, which enables empirical and theoretical analysis of the puzzle in unprecedented detail. I uncover two stylized facts (1) sectoral home bias is stronger for nontradable sectors and in countries with a higher degree of capital restrictions, and (2) investors tilt portfolios more towards domestic assets for the sectors in which their countries reveal a comparative advantage. Motivated by these findings, I build a multi-sector model that incorporates transaction costs, information asymmetry, and risk-hedging motives in investors' portfolio choice. Moreover, I quantify the effects of these frictions on both sector- and country-level home bias in a calibrated DSGE model. This framework sheds light on the patterns and determinants of international financial investment.
| Author | : Kavous Ardalan |
| Publisher | : Routledge |
| Total Pages | : 243 |
| Release | : 2019-05-17 |
| Genre | : Business & Economics |
| ISBN | : 1000001431 |
This book provides a comprehensive and critical analysis of research outcomes on the equity home bias puzzle – that people overinvest in domestic stocks relative to the theoretically optimal investment portfolio. It introduces place attachment – the bonding that occurs between individuals and their meaningful environments – as a new explanation for equity home bias, and presents a philosophically multi-paradigmatic view of place attachment. For the first time, a comprehensive and up-to-date review of the extant literature is provided, demonstrating that place attachment is a contributing factor to 22 different topics in which variations of home bias are present. The author also analyses the social-psychological underpinnings of place attachment, and considers the effect of multi-culturalism on the future of equity home bias. The book’s unique approach discusses the issues in conceptual terms rather than through data and statistical methods. This multi- and inter-disciplinary book is an invaluable resource for graduate students and researchers interested in economics, finance, philosophy, and/or methodology, introducing them to a new line of research.
| Author | : Piet Sercu |
| Publisher | : |
| Total Pages | : |
| Release | : 2007 |
| Genre | : |
| ISBN | : |
| Author | : Hisham S. Foad |
| Publisher | : |
| Total Pages | : 31 |
| Release | : 2007 |
| Genre | : |
| ISBN | : |
This paper examines explanations for the equity home bias puzzle by utilizing the introduction of the euro in 1999 as a natural experiment. Equity home bias is the observation that although investors could attain both lower risk and greater returns by increasing international diversification in their equity portfolios, they fail to do so. Currency risk, informational asymmetries, transaction costs, and investor sentiment have all been presented as explanations for the bias with varying degrees of success. The introduction of the euro and the coordination of monetary policy across the Euro Area (EA) allows for a closer examination of these potential explanations. Optimal foreign equity shares are derived from a version of the CAP-M and then empirically tested using detailed data from the IMF's Coordinated Portfolio Investment Survey covering the foreign equity holdings of 23 countries for the years 1997 and 2001-2004. The key results of this analysis are that while equity home bias has fallen worldwide over this period, by far the sharpest drop has been for intra-EA equity holdings with home bias falling from 68% to 29% between the pre and post-euro periods. Several explanations for this drop are tested, with the reduction in information asymmetries emerging as the most promising candidate.
