Journal
JOURNAL OF ECONOMIC SURVEYS
Volume 33, Issue 3, Pages 949-967Publisher
WILEY
DOI: 10.1111/joes.12302
Keywords
Equity; Home Bias; Puzzle; Review
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This paper reviews the relatively more recent literature on equity home bias - the empirical finding that people overinvest in domestic stocks relative to the optimal investment portfolio implied by the modern portfolio theory. It reviews six broad classes of explanation of this puzzling phenomenon: (1) hedging home risks; (2) barriers to foreign investments; (3) information asymmetries; and (4) behavioral factors. The consensus is that none of the explanations can account for the full extent of the bias by itself, thus the home bias should be explained by a combination of rational and behavioral factors.
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