Stress Testing the Equity Home Bias: A Turnover Analysis of Eurozone Markets

Abstract

Shifts in equity turnover happen on and around holidays because rationally bounded investors become distracted. Their pattern reveals a persistent equity home bias even in the Eurozone, a stress test case for the survival of this bias given the high level of economic and financial development and integration in this area. The bias is greater for small caps because investors are reluctant to hold this class of foreign asset. Our study corroborates calendar anomalies in trading volumes, but refutes the hypothesis regarding turnover sensitivity to stock returns common in the empirical and theoretical literature based on investor heterogeneity and short sale constraints. Our results reveal vanishing cost asymmetries in taking long rather than short positions.

Keywords: equity markets; trading volumes; holiday effect; Eurozone exchanges

JEL Classification: G12, G41, F36