Blogs & Comment

A new study on home bias

Many research papers have appeared on the topic of home bias. Concentrating a portfolio in domestic stocks lowers diversification and increases risk, which does not seem very consistent with the view that markets are efficient and investors are rational. The fuzzy dimensions of this anomaly present a rich vein to mine, and quite likely helped a fewprofessors secure tenure.
One oft-heard explanation is that there are obstacles to investing in foreign equities, such as legal restrictions and extra transaction costs. Professors Isaac Ehrlich, Jong Kook Shin and Yong Yin offer an additional explanation in their recently released working paper, Human Capital, Endogenous Information Acquisition, and Home Bias in Financial Markets.
They looked at home bias across different countries and found a reverse correlation with human-capital endowments, as represented by level of educational attainment. In other words, the greater the level of education, the lower was home bias among investors in a country. The implication seems to be that home bias reflects, at least in part, knowledge issues and data-gathering skills.
According to Figure 3 in the paper, the highest allocation to home equities was claimed by Brazil (100%), which also had the lowest educational level. Norway (60%) had the lowest allocation to domestic stocks and the second-highest educational level. First in educational attainment was the U.S but its home bias of 80% was somewhat elevated relative to the central tendency. Canadas bias of 75% was in line with its educational ranking of 5th highest.