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

33 Pages Posted: 13 Dec 2010

See all articles by Margarida Abreu

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: December 12, 2010

Abstract

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

Abreu, Margarida and Mendes, Victor and Santos, João A. C., Home Country Bias: Does Domestic Experience Help Investors Enter Foreign Markets? (December 12, 2010). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1724388

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

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 (Contact Author)

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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