Home Country Bias: Does Domestic Experience Help Investors Enter Foreign Markets?

Abstract:     
This paper investigates whether investors' domestic experience helps them enter foreign markets. We show that investors first invest in domestic securities and only some time later they invest in foreign securities. Our investigation of the length of time it takes investors to start investing in foreign securities shows that investors who trade more often in the domestic market start to invest abroad earlier. It appears that the experience these investors acquire while they trade in the domestic market is a key reason why they enter the foreign market earlier. A reason is that highly educated investors as well as investors with more financial knowledge, arguably those for whom learning by trading is the least important, do not need to trade as much in the domestic market before they start investing in foreign securities. Another reason is that investors who start investing in foreign securities are able to improve on their performance afterwards. This improvement in performance, besides adding support to the learning explanation, constitutes also evidence that the home country bias is costly.

Number of Pages in PDF File: 30

Keywords: learning, home country bias, duration analysis

JEL Classification: G11, G15, F30

working papers series