Home Country Bias: Does Domestic Experience Help Investors Enter Foreign Markets?
33 Pages Posted: 13 Dec 2010
Date Written: December 12, 2010
This paper investigates the dynamics of individuals' investments leading up to their decision to make the first investment abroad. We show that investors first invest in domestic securities and only some time later they invest abroad in foreign securities. We also show that investors who trade more often in the domestic market start to invest abroad earlier. Our findings suggest that the experience investors acquire while they trade in the domestic market is a key reason why active investors 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 afterward. This improvement in performance constitutes further evidence that the home country bias is costly, thereby confirming that there are gains for investors from investing abroad.
Keywords: Learning, home country bias, duration analysis
JEL Classification: G11, G15, F30
Suggested Citation: Suggested Citation