Equities

Home Bias at Home: Local Equity Preference in Domestic Portfolios

January 1, 1999 - Joshua D Coval Tobias J. Moskowitz

Topics - Equities

The strong preference for domestic equities exhibited by investors in international markets, despite the well-documented gains from international diversification, remains an important yet unresolved empirical puzzle in financial economics.

Though such behavior appears to be grossly inefficient from a diversification standpoint, academics have offered a variety of explanations for this phenomenon.

Home bias explanations can be assigned to two groups: those that rely on national/governmental frictions and those that rely on frictions associated with distance. As we demonstrate in this study, since the latter set of frictions is not unique to the international economy, the distance effect can be gauged by examining domestic investment portfolios. Indeed, judging from the domestic evidence in this paper, geographic proximity plays an important role in determining investor portfolio choice. On an international scale, investment proximity may account for a large portion of the observed abstinence in holdings of foreign securities.

Furthermore, we identify several firm characteristics that account for a substantial fraction of the local equity preference. Specifically, local holdings tend to be in small, nontraded-goods-producing firms with high degrees of financial leverage. These results suggest that information asymmetries may be driving the observed preference for geographically proximate firms.

Moreover, they may indicate an important link between local equity preference and the cross-sectional asset pricing implications associated with size and firm distress. Finally, these results are common across a variety of manager types and fund classes.

Published in

Journal of Finance

View
Related Thinking

This document is not intended to, and does not relate specifically to any investment strategy or product that Lodestone Wealth offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.

 

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Lodestone Wealth Management LLC (“Lodestone Wealth”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. Diversification does not eliminate the risk of experiencing investment losses. 

This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of Lodestone Wealth. The views expressed reflect the current views as of the date hereof and neither the author nor Lodestone Wealth undertakes to advise you of any changes in the views expressed herein. 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither Lodestone Wealth nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.

The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.