Local Bias and Stock Market Conditions

31 Pages Posted: 17 Mar 2012

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 2012

Abstract

We show that the local bias in US mutual fund portfolios varies significantly over time and is more pronounced at times of heightened market uncertainty, such as during financial crises. Similarly, local bias is less pronounced in periods when market sentiment is strong. These results do not depend on past fund performance or fund inflows during good times. Additionally, we do not find that fund managers earn superior returns on local stocks during periods of heightened market uncertainty. Overall, we conclude that informational advantages or scale economies are unlikely to be important factors in explaining the dependence of local bias on market conditions, and that our evidence is more consistent with a behavioral explanation whereby changes in market conditions affect the preference for local stocks of ambiguity averse investors.

Keywords: mutual funds, local bias, market conditions

JEL Classification: G11, G23

Suggested Citation

Giannetti, Mariassunta and Laeven, Luc A., Local Bias and Stock Market Conditions (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2023679 or http://dx.doi.org/10.2139/ssrn.2023679

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Swedish House of Finance ( email )

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Luc A. Laeven

European Central Bank (ECB) ( email )

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Germany

Centre for Economic Policy Research (CEPR)

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United Kingdom

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