Home Bias in International Equity Portfolios: A Review

Abstract

This paper reviews the recent literature on equity home bias - the empirical finding that people over invest in domestic stocks relative to the theoretically optimal investment portfolio. We cover different home bias measures and we illustrate the extent and the evolution of equity home bias both with recent portfolio holdings data and longer time series. Institutional-based and behavior-based explanations for the puzzle are considered and discussed. We conclude that none of the proposed theories can explain the full extent of the bias by itself, thus we argue that international portfolio choice should be explained by a mixture of rational and irrational behavior.