A Return-Based Approach to Identify the Home Bias of European Equity Funds

Home Bias: Evidence From the Stock Exchange

“…However, nowadays integration between countries is increasingly removing barriers to trade and information, reducing the costs of investing in foreign assets and stimulating unification of standards, policies and good practices (Levy and Levy, 2014). Nevertheless, recent research shows that home bias remains there even though one would expect it to disappear or to be reduced significantly, especially in countries with high capital mobility and low investment barriers, like the US or the EU (Levy and Levy, 2014;Maier and Scholz, 2016). Hence, the aim of this research is to estimate the home bias effect under the lack of traditional investment barriers and to analyze what factors determine it.…”

“…To the best of our knowledge, this is the first paper that analyzes the impact of ethnic, linguistic and religious diversity, as well as cultural openness to investments, on home bias. Methodology In order to quantify home bias, we follow the most popular approach used in recent research and define it as a deviation of the actual portfolio from the optimal one (Anderson et al, 2011;Shingava, 2014;Mishra, 2015;Maier and Scholz, 2016). An optimal portfolio is derived from the international capital asset pricing model (ICAPM) assuming no transaction costs, equal access of investors to foreign and domestic shares and no exchange rate risks.…”