Home bias

The term home market bias or equity home bias puzzle describes the tendency of investors to weight investments on the home market disproportionately.

background

The portfolio theory shows that the asset allocation , ie the distribution of investment in various (not perfectly correlated with each other) asset classes to an increase in the expected return for the same risk may result. For this reason, it would theoretically make sense to distribute the investment amount in the portfolio across a large number of national markets. In practice, however, one observes that investors invest their investments far more than proportionately on the respective home market. This effect is called "home bias". This effect was first described by Kenneth French and James M. Poterba (1991) and Linda Tesar and Ingrid Werner (1995).

reasons

There are three main reasons for the home bias:

• Transaction costs : An investment abroad is associated with higher transaction costs. Avoiding these increases the return on the investment. This also applies to double taxation: risk or additional expense from foreign withholding taxes
• Information deficit: While the investor is relatively well informed about the companies on the home market and therefore believes that he can assess the opportunities and risks well, he lacks this information when investing in foreign markets
• Exchange rate risks: Since the investor's return is determined not only by the return on the investment but also by the change in the exchange rate , an investment in the same currency area appears to be risk-free

literature

• Dennis Huchzermeier: Home bias among private and institutional investors. An empirical study. Diplomica, Hamburg 2007, ISBN 978-3-8366-5166-0 (also: Hannover, Univ., Diploma thesis, 2005).

Individual evidence

1. ↑ Kenneth French, James M. Poterba: Investor Diversification and International Equity Markets  ( page no longer available , search in web archives )  Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice.   . In: American Economic Review. Papers and Proceedings , 81: 222-226 (1991), ISSN  0065-812X .
2. ↑ Linda Tesar, Ingrid Werner: Home Bias and High Turnover  ( page no longer available , search in web archives )  Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice.   . In: Journal of International Money and Finance , Vol. 14 (1995), Issue 4, pp. 467-492, ISSN  0261-5606 .