Attempts To Resolve The Puzzle
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 (2005) point out, this seems to replace the assumption of capital immobility with the assumption of information immobility.
In some countries, like Belgium, holding stocks of foreign companies implies a double taxation on dividends, once in the country of the company and once in the country of the stockholder, while domestic stock dividends are taxed only once.
Read more about this topic: Equity Home Bias Puzzle
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