Home Bias at Home: Local Equity Preference in Domestic Portfolios

Coval, Joshua D.; Moskowitz, Tobias J.

doi:10.1111/0022-1082.00181

Cited by 2,549 publications

(1,341 citation statements)

References 51 publications

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“…In their setting, an investor has perfect knowledge about the future value of the security at time T , and thus faces an arbitrage opportunity related to a security, which is modeled as a Brownian Bridge process. 8 This result is consistent with the 3-factor pricing model of Fama and French (see ) in which the factors HML or SMB are functions of the price of the security.…”

Section: Introductionsupporting

confidence: 86%

“…In both cases, it is intuitively clear that the active investors will perceive that both the risk and expected return of the stock will be a function of the current price. 8 The fact that risk and return vary with price, from the standpoint of the active investor, is contrary to standard models such as the CAPM 9 or the Black-Scholes-Merton option 4 Under the assumption of existence of market frictions and imperfections, Basak and Croitoru (2000) show that mispricing can be sustainable in general equilibrium.…”

Section: Introductionmentioning

confidence: 95%

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Beliefs regarding fundamental value and optimal investing

2009

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We derive optimal portfolio weights for an investor who has specific beliefs regarding the distribution of a stock price at a future time. For example, a fundamental investor will want to take advantage of the information his analysis provides when constructing a portfolio. In this regard, we examine the optimal weights for models in which the investor believes that there is a range in which the price is likely to remain. Under such circumstances, the optimal strategy is to take significant long/short positions as the price nears its lower/upper boundary. The risk, expected stock return and the optimal investment strategy are thus dependent on the stock price relative to the boundaries.

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Section: Introductionsupporting

confidence: 86%

Section: Introductionmentioning

confidence: 95%

Beliefs regarding fundamental value and optimal investing

2009

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“…For example, if privileged information mainly "trickles down" from the company's headquarters (see Davis and Henderson (2004); Pirinsky and Wang (2006)), one could expect informed trading to concentrate in the market closest to the headquarters. And in fact, Grinblatt and Keloharju (1999) show that Finnish investors' portfolios overweight the stocks of geographically close companies, and Coval and Moskowitz (1999) detect a similar bias in the portfolio choices of US domestic funds. Brennan et al (2005) provide further evidence on the informational disadvantage of foreign investors.…”

Section: Information-based Tradingmentioning

confidence: 94%

Where Is the Market? Evidence from Cross-Listings in the United States

Halling¹,

Pagano²,

Randl³

et al. 2007

Rev. Financ. Stud.

116

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We analyze the location of stock trading for firms with a US cross-listing. The fraction of trading that occurs in the United States tends to be larger for companies from countries that are geographically close to the United States and feature low financial development and poor insider trading protection. For companies based in developed countries, trading volume in the United States is larger if the company is small, volatile, and technology-oriented, while this does not apply to emerging country firms. The domestic turnover rate increases in the cross-listing year and remains higher for firms based in developed markets, but not for emerging market firms. Domestic trading volume actually declines for companies from countries with poor enforcement of insider trading regulation. (JEL G15, G30.) Many companies list their shares not only on their domestic exchange, but also on foreign exchanges-a fact for which several reasons have been offered and explored (see Saudagaran (1988); Karolyi (1998Karolyi ( , 2006Baker, Nofsinger, and Weaver (2002);Pagano, Röell, and Zechner (2002);Doidge, Karolyi, and Stulz (2004);and Sarkissian and Schill (2004), among others). One motive often hypothesized for this decision is that cross-listing facilitates trading by foreign investors. If so, then one would expect cross-listings to be followed by fairly substantial and persistent trading activity in the foreign market.

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“…Even within countries, there is evidence that investors tend to hold stocks of local companies, about which they presumably have more information. For example, Coval and Moskowitz (1999) show that U.S. investment managers exhibit a strong preference for locally-headquartered firms. Each of these studies suggests that asymmetric information between local and non-local investors may be an important factor for investment decisions.…”

Section: Introductionmentioning

confidence: 99%

Information costs and home bias: an analysis of US holdings of foreign equities

Ahearne

Griever

Warnock

2004

Journal of International Economics

686

301

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We aim to provide insight into the observed equity home bias phenomenon by analyzing the determinants of U.S. holdings of equities across a wide range of countries. In particular, we explore the role of information costs in determining the country distribution of U.S. investors' equity holdings using a comprehensive new data set on U.S. ownership of foreign stocks. We find that U.S. holdings of a country's equities are positively related to the share of that country's stock market that is listed on U.S. exchanges, even after controlling for capital controls, trade links, transaction costs, and historical risk-adjusted returns. We attribute this finding to the fact that foreign firms that list on U.S. exchanges are obliged to provide standardized, credible financial information, thereby reducing information costs incurred by U.S. investors. This obligation stems from U.S. investor protection regulations, which include stringent disclosure requirements, reconciliation of financial statements to U.S. standards, and an investor-friendly regulatory environment. Our results support the hypothesis that information costs are an important source of home bias: Foreign countries whose firms do not alleviate information costs by listing on a U.S. exchange are more severely underweighted in U.S. equity portfolios.JEL Classification: G11, G15, M40, K00

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Home Bias at Home: Local Equity Preference in Domestic Portfolios

Cited by 2,549 publications

References 51 publications

Beliefs regarding fundamental value and optimal investing

Beliefs regarding fundamental value and optimal investing

Where Is the Market? Evidence from Cross-Listings in the United States

Information costs and home bias: an analysis of US holdings of foreign equities

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