The Equity home bias puzzle is the term given to describe the fact that individuals and institutions in most countries hold only 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) and Tesar and Werner (1995).
Coval and Moskowitz (1999) showed that home bias is not limited to international portfolios, but that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, they showed that U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly leveraged firms that produce nontradable goods.
Maurice Obstfeld and Kenneth Rogoff identifies this as one of the six major puzzles in international macroeconomics. The others are the Feldstein-Horioka puzzle, the home bias in trade puzzle, the consumption correlations puzzle, the purchasing power and exchange rate disconnect puzzle, and the Baxter-Stockman neutrality of exchange rate regime puzzle.
The home bias also creates some less obvious problems for investors, by diminishing the cost of capital for companies it limits the shareholders' ability to influence management by threatening to walk out. It partly explains why foreign investors tend to be better at monitoring firms they invest into.
Read more about Equity Home Bias Puzzle: Attempts To Resolve The Puzzle
Other articles related to "equity home bias puzzle":
... Another hypothesis is that investors have superior access to information about local firms or economic conditions ... But as van Nieuwerburgh and Veldkamp (2005) point out, this seems to replace the assumption of capital immobility with the assumption of information immobility ...
Famous quotes containing the words puzzle, bias, equity and/or home:
“The at present unutterable things we may find somewhere uttered. These same questions that disturb and puzzle and confound us have in their turn occurred to all the wise men; not one has been omitted; and each has answered them, according to his ability, by his words and his life.”
—Henry David Thoreau (1817–1862)
“The solar system has no anxiety about its reputation, and the credit of truth and honesty is as safe; nor have I any fear that a skeptical bias can be given by leaning hard on the sides of fate, of practical power, or of trade, which the doctrine of Faith cannot down-weigh.”
—Ralph Waldo Emerson (1803–1882)
“If equity and human natural reason were allowed there would be no law, there would be no lawyers.”
—Christina Stead (1902–1983)
“As I came home through the woods with my string of fish, trailing my pole, it being now quite dark, I caught a glimpse of a woodchuck stealing across my path, and felt a strange thrill of savage delight, and was strongly tempted to seize and devour him raw; not that I was hungry then, except for that wildness which he represented.”
—Henry David Thoreau (1817–1862)