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Beliefs and the equity home bias

Author

Listed:
  • Zhu, Xinxin
  • Jiao, Peiran
  • Zong, Jichuan

Abstract

We investigate the belief-based mechanism that potentially drives the equity home bias puzzle using a novel experimental design. We find that geographical information causally shapes investor beliefs, leading to a home bias effect in beliefs. Participants expect higher returns and lower risk from local stocks compared to non-local ones. Loss probability strongly predicts risk perception, but its effect weakens when the stock is local. Yet, we do not find a home bias in investment choices.

Suggested Citation

  • Zhu, Xinxin & Jiao, Peiran & Zong, Jichuan, 2024. "Beliefs and the equity home bias," Economics Letters, Elsevier, vol. 244(C).
    • Handle: RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524004671
    DOI: 10.1016/j.econlet.2024.111983
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    More about this item

    Keywords

    Home bias; Subjective belief distribution; Risk perception; Return expectation; Experiment;
    All these keywords.

    JEL classification:

    • C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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