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The Home Bias: Evolution, Determinants, and Financial Crises

Author

Listed:
  • Rifa Atrous
  • Ezzeddine Abaoub

Abstract

This article examines the persistent phenomenon of “home bias” and its determinants in international portfolio management, with a particular focus on the inherent challenges posed by the puzzle of preference for domestic assets and its impact on financial markets, highlighting the period of the COVID-19 pandemic. Utilizing a multiple linear regression model, estimated through Ordinary Least Squares (OLS) method, applied to data covering 43 countries over a 15-year period, this study reveals that home bias remains more pronounced in emerging economies, with significant variations in terms of factors such as economic development, governance, financial openness, information asymmetry, technology, and other explanatory variables. The findings underscore the crucial importance of understanding the underlying mechanisms of home bias, especially during financial crises, for investors, regulators, and policymakers. Additionally, the article suggests that information asymmetry continues to play a vital role in this preference, but other economic and behavioral factors also influence foreign investment decisions.

Suggested Citation

  • Rifa Atrous & Ezzeddine Abaoub, 2024. "The Home Bias: Evolution, Determinants, and Financial Crises," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 16(7), pages 1-60, July.
    • Handle: RePEc:ibn:ijefaa:v:16:y:2024:i:7:p:60
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    References listed on IDEAS

    as
    1. Mishra, Anil V., 2015. "Measures of equity home bias puzzle," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 293-312.
    2. Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004. "Information costs and home bias: an analysis of US holdings of foreign equities," Journal of International Economics, Elsevier, vol. 62(2), pages 313-336, March.
    3. Jérôme Lahaye & Christopher Neely, 2020. "The Role of Jumps in Volatility Spillovers in Foreign Exchange Markets: Meteor Shower and Heat Waves Revisited," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(2), pages 410-427, April.
    4. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2007. "Home bias in global bond and equity markets: The role of real exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 631-655, June.
    5. Kavous Ardalan, 2019. "Equity Home Bias: A Review Essay," Journal of Economic Surveys, Wiley Blackwell, vol. 33(3), pages 949-967, July.
    6. Ferreira, Miguel A. & Miguel, Antonio F., 2011. "The determinants of domestic and foreign bond bias," Journal of Multinational Financial Management, Elsevier, vol. 21(5), pages 279-300.
    7. Morse, Adair & Shive, Sophie, 2011. "Patriotism in your portfolio," Journal of Financial Markets, Elsevier, vol. 14(2), pages 411-440, May.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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