Behavioral Finance: Equity Home Bias Puzzle

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Behavioral Finance: Equity Home Bias Puzzle

Behavioral Finance: The well documented “Equity home bias puzzle” refers to the fact that investors tend to hold poorly diversified portfolios by favoring domestic stocks over international stocks. However, I show that even holdings of international stocks exhibit a form of home bias. I find that U.S. mutual funds invest significantly more in countries that have a strong associated ethnic group population near the funds’ offices. Mutual funds that take advantage of the information generated by the local ethnic groups out-perform otherwise similar funds by more than 1.4% per quarter in their foreign holdings. This paper documents a new form of home bias, sheds light on a new information channel for foreign investment decisions, and contributes to the debate on whether mutual fund managers have skills.

See accompanying Bloomberg article-Where Is Your Fund Manager From?

Download paper here- ssrn.com

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