Beliefs and the Equity Home Bias

Abstract

We investigate the belief-based mechanism that potentially drives the equity home bias puzzle using a novel experimental design. We find that geographical information causally shapes investor beliefs, leading to a home bias effect in beliefs. Participants expect higher returns and lower risk from local stocks compared to non-local ones. Loss probability strongly predicts risk perception, but its effect weakens when the stock is local. Yet, we do not find a home bias in investment choices.

Keywords: Home bias, Subjective belief distribution, Risk perception, Return expectation, Experiment JEL Codes: C99, D83, D84, D91, G41