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The Cost of Home Bias - Empirical Evidence and Implications for Stock Market ParticipationRalph BluethgenEBS Universität für Wirtschaft und Recht - EBS Business School Steffen MeyerGoethe University Frankfurt - Department of Finance Christian JansenEBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance, Accounting and Real Estate Andreas HackethalGoethe University Frankfurt - Department of Finance March 4, 2008 Abstract: Empirical studies on household portfolios uniformly document a strong home bias in private investors' portfolios. This paper uses both parametric and historical simulation techniques to quantify the cost induced by home bias. Our results reveal major country-specific differences in the benefits derived from international diversification. While we find a detrimental effect of home bias on portfolio performance for German investors, the effect for US investors is rather small in magnitude. We show that an increased awareness of the benefits of international diversification might positively affect the decision of individual investors to participate in the stock market.
Number of Pages in PDF File: 32 Keywords: household finance, home bias, investment mistakes, stock market participation JEL Classification: G11, D10 working papers seriesDate posted: March 19, 2008Suggested CitationContact Information
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