Equity home bias puzzle

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The Equity home bias puzzle is the term given to describe the fact that individuals and institutions in most countries hold modest amounts of foreign equity. This is puzzling since observed returns on national equity portfolios suggest substantial benefits from international diversification. The home bias in equities was first documented by French and Poterba (1991)^[1] and Tesar and Werner (1995)^[2].

[edit] Possible explanations

One hypothesis is that capital is internationally immobile across countries, yet this is hard to believe given the volume of international capital flows among countries.

Another hypothesis is that investors have superior access to information about local firms or economic conditions. But as van Nieuwerburgh and Veldkamp (2007)^[3] points out, this seems to replace the assumption of capital immobility with the equally implausible assumption of information immobility.

[edit] References