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Non-fundamental home bias in international equity markets

Author

Listed:
  • Gyu Hyun Kim
  • Hoffmann Kim

Abstract

This paper examines the home bias in the international equity market using 1) the country-level behavioral factor and 2) the home-foreign return correlation. Specifically, we use responses to the question regarding the level of trust toward strangers as a measure for the behavioral factor that we call country-specific unfamiliarity. The empirical results based on the data from eleven developed countries suggest that country-specific unfamiliarity has a significant and positive correlation with the equity home bias. On the other hand, we find that the home-foreign return correlation is negatively correlated with the equity home bias, which goes against our hypothesis. We check for the robustness of our empirical analysis by fitting alternative specifications and using a log-transformed measure of the equity home bias.

Suggested Citation

  • Gyu Hyun Kim & Hoffmann Kim, 2022. "Non-fundamental home bias in international equity markets," International Economics, CEPII research center, issue 170, pages 213-234.
    • Handle: RePEc:cii:cepiie:2022-q2-170-14
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    Cited by:

    1. Pavlo Dziuba & Darya Glukhova & Kyryl Shtogrin, 2022. "Risk, Return And International Portfolio Diversification: K-Means Clustering Data," Baltic Journal of Economic Studies, Publishing house "Baltija Publishing", vol. 8(3).
    2. Tang, Xinmeng & Zhou, Xiaoguang, 2023. "Impact of green finance on renewable energy development: A spatiotemporal consistency perspective," Renewable Energy, Elsevier, vol. 204(C), pages 320-337.

    More about this item

    Keywords

    Equity home bias; Unfamiliarity; Return correlation across the equity markets;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F6 - International Economics - - Economic Impacts of Globalization
    • G1 - Financial Economics - - General Financial Markets
    • G4 - Financial Economics - - Behavioral Finance

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