Equity home bias puzzle

The term home market preference and equity home bias puzzle refers to the tendency of investors to prioritize investments in the domestic market disproportionately.

Background

The portfolio theory shows that the asset allocation, ie, the distribution of investment leads to different ( statistically independent from each other ) asset classes in an increase in the rate of return for the same risk. For this reason, a distribution of the amount invested in the portfolio on a variety of national markets would be theoretically meaningful. In practice, one observes, however, that investors invest their assets far above average on the respective home market. This effect is called " home bias ". This effect was by Kenneth French and James M. Poterba ( 1991) and Linda Tesar and Ingrid Werner ( 1995) described for the first time.

Reasons for the home bias 3 aspects are given essentially:

• Transaction costs: An investment abroad is associated with higher transaction costs. This to avoid increasing the return on investment
• Lack of information: While the investors about the companies in the home market is relatively well informed and therefore believes, among other things, the opportunities and risks to assess good to him this information is missing in plants in foreign markets
• Foreign Exchange Risk: Since the investors return is determined in addition to the return of the investment itself by the change in the exchange rate, a risk-free investment appears in the same currency area