The home bias and the local bias: A survey
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The home bias and the local bias: A survey Eduard Gaar1 · David Scherer1 · Dirk Schiereck1 Received: 16 April 2020 / Accepted: 21 October 2020 © The Author(s) 2020
Abstract The home bias like the disposition effect is a well-researched economic phenomenon in investor behaviour which has been examined in finance journal articles for decades. While there is little doubt about the existence of the bias, its magnitude varies across countries and investor groups. The home bias has to be regarded as a multifactorial phenomenon, a combination of numerous causes which all synergistically contribute. In contrast to other biases the home bias can at least partially be explained by reasons beyond irrational investor behaviour. While institutional restrictions play a minor role, informational asymmetries and superior information of domestic investors are important factors. Thus, the performance of investments may well benefit from a home bias, and the bias then no longer would be a puzzle but rather rational behaviour as a lower diversification level may lead to higher returns. The contemporary understanding of the home bias gains in relevance as the ongoing political debate in Germany has to clarify an institutional framework for long-run retirement savings plans of private households based on equity investments. Keywords Home bias · Local bias · Domestic bias · Behavioural bias · Market imperfections JEL Classification D14 · D91 · E71 · G11 · G12 · G41
1 Introduction In a frictionless perfect global capital market, investors should invest the risky part of their savings completely in the market portfolio to optimize their risk-return patterns and to comply with classical approaches as the CAPM (Sharpe 1964). However, empirical research provides evidence for decades that in real markets investors deviate from this portfolio structure which is optimal in perfect markets. The home * Eduard Gaar eduard.gaar@tu‑darmstadt.de 1
Department of Business Administration, Economics and Law, Technical University of Darmstadt, Hochschulstraße 1, 64289 Darmstadt, Germany
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bias belongs to the puzzles in economics, proven empirically, that do not fit into (neoclassical) theory (Obstfeld and Rogoff 2000). Following the home bias and the intra-national local bias investors are inclined to invest disproportionately into local and domestic assets, not following portfolio diversification strategies. Based on capital market models, the home bias has been elaborated (Black 1974; Michaelides 2003; Stulz 1981a, 1981b), and empirical research on the bias started with French and Poterba (1991) studying U.S., UK and Japan. Cooper and Kaplanis (1994) and Fidora et al. (2007) among others confirmed the patterns of the home bias for these three countries. Additional evidence for Germany, France, Italy and Sweden documents the global reach of the phenomenon (Anderson et al. 2011; Chan et al. 2005; Lau et al. 2010; Mishra 2015; Lippi 2016). The local bias as the intranational equivalent has been detected fo
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