The Home Bias Puzzle in Equity Portfolios

Abstract

Abstract This chapter reviews the recent literature on equity home bias and shows that people overinvest in domestic stocks relative to the theoretically optimal investment portfolio. The chapter examines different home bias measures and illustrates the extent and the evolution of equity home bias both with recent portfolio holdings data and longer time-series. Institutional-based and behavior-based explanations for the puzzle are considered and discussed. The chapter concludes that none of the proposed theories can explain the full extent of the bias by itself. International portfolio choice might very well be caused by a mixture of rational and irrational factors.

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