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

30 Pages Posted: 4 Feb 2009 Last revised: 18 Jan 2011

Margarida Abreu

ISEG-UTL; Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE); Instituto Superior de Economia e Gestão - CISEP

Victor Mendes

CMVM - Comissao do Mercado de Valores Mobiliarios

João A. C. Santos

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: February 2, 2009

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.

Keywords: learning, home country bias, duration analysis

JEL Classification: G11, G15, F30

Suggested Citation

Abreu, Margarida and Mendes, Victor and Santos, João A. C., Home Country Bias: Does Domestic Experience Help Investors Enter Foreign Markets? (February 2, 2009). Available at SSRN: https://ssrn.com/abstract=1336768 or http://dx.doi.org/10.2139/ssrn.1336768

Margarida Abreu

ISEG-UTL ( email )

R. Miguel Lupi, 20
Lisbon, 1200
Portugal

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE) ( email )

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

Instituto Superior de Economia e Gestão - CISEP ( email )

Rua Miguel Lupi 20
Lisboa, 1200-725
Portugal

Victor Mendes (Contact Author)

CMVM - Comissao do Mercado de Valores Mobiliarios ( email )

Avenida Fontes Pereira de Melo, 21
Lisbon, 1056-801
Portugal
(351) 213177000 (Phone)
(351) 213537077/8 (Fax)

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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