Home Bias

In: Other Topics

Submitted By Joyce1996
Words 1132
Pages 5
Home bias is one of the issues that have been identified based on this case study. Home bias is defined as the preference of the investor invests the equity mainly in domestic market rather than invest in the foreign market even though they can gain substantial benefit due to international diversification. The term of “equity home bias puzzle” is referring to the concept of holding extremely large proportion of domestic equity compare to foreign equity. This phenomenon also exists in other countries, which the investor seems to ignore the opportunity of investing in foreign equity and focus on local market. This statement can be further support by French and Poterba (1991) which states that approximately 94% of the funds are allocated to domestic security market, although the equity market in US only added up to less than 48% of global equity market as a whole. Therefore, extensive amount of studies have been conducted in order to identify the driving force behind the home bias. Based on the findings of the empirical studies, it reveals that the determinant of home bias can be conclude as high transaction cost and information asymmetric.

One of the factor the cause the arisen of home bias is due to the high transaction cost. Transaction costs have been appeared in a few research papers but most of them have been ended with different conclusion. The research conducted by Domowitz, Glen, and Madhavan (1998) have classified the transaction cost into three components that is commission, fee and “market impact” cost. Market impact cost is defined as the expense incurred to the trader when trading a security. The cost often leads to a fluctuation in the market that will affect the market liquidity when the security is invested. However, some research argues that transaction costs are unlikely to explain the puzzle of home bias. In the research investigate by Tesar and…...

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