Home Sweet Home: Home Bias and International Diversification Among Individual Investors

37 Pages Posted: 3 Aug 2004

See all articles by Anders Karlsson

Anders Karlsson

Stockholm University - Department of Corporate Finance

Lars L. Norden

Stockholm University - Stockholm Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 2004

Abstract

A striking feature of international portfolio investment is the extent to which equity portfolios are concentrated in the domestic market of the investor. Many authors have tried to explain this home bias, but so far, this literature has not succeeded in providing a generally accepted explanation for it. Also, there are no previous results regarding home bias on an individual level, i.e. what characterises an individual who show a relatively large reluctance towards international diversification and investments. The purpose of this study is to investigate whether there is a home bias in the portfolios of mutual funds, which are formed as a part of the pension plan in Sweden. While controlling for several reasons for home bias which are found in the previous research, as e.g. transactions costs and risk level of investments, this study analyses the nature of portfolio allocation and the home bias on an individual investor basis. A multinomial logit model is formulated to estimate the likelihood of home bias, where demographical features of the individuals are used as explanatory variables. The results show several significant, statistically and economically, relationships between individual characteristics and the likelihood of home bias. In particular, age, gender, net wealth, occupation and familiarity with risky investments are important. The type of individual with the highest likelihood of home bias is identified as a not so wealthy older man, who works for the government and holds no other risky assets.

Suggested Citation

Karlsson, Anders and Nordén, Lars L., Home Sweet Home: Home Bias and International Diversification Among Individual Investors (March 2004). EFA 2004 Maastricht Meetings Paper No. 3363. Available at SSRN: https://ssrn.com/abstract=559947 or http://dx.doi.org/10.2139/ssrn.559947

Anders Karlsson

Stockholm University - Department of Corporate Finance ( email )

School of Business
SE-106 91 Stockholm
Sweden
+46 8 162180 (Phone)
+46 8 153054 (Fax)

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,267
Abstract Views
5,447
rank
16,077
PlumX Metrics