Equity Home Bias in Emerging and Advanced Economies: Trend Before and During COVID-19

Various explanations are given for the equity home bias phenomenon and information asymmetry is one of them. Coronavirus-19 (COVID-19) saw extensive use of digital communication technology which has significantly improved access to information and makes a curious case to study the equity home bias for select developed and emerging economies before and during COVID-19 (economic crisis). Using a well-established methodology to compute home bias through the relative share of domestic and foreign equities in world market capitalization, this study examines the equity home bias of 22 emerging and advanced economies before and during COVID-19. In 14 of the 22 countries studied, there was a larger reduction in equity home bias during COVID-19 compared to the pre-COVID period. Further, the reduction in home bias in 10 of these countries represents a structural shift from the earlier trend. This reduction in equity home bias during an economic crisis contradicts well-established studies that suggest economic shocks and crises compel investors to under-diversify and liquidate foreign investments which increases the equity home bias phenomenon. Further, the results of this study suggest distance as a proxy for information asymmetry has lower explanatory power in the current context.