Determinants of Home Bias: Evidence From European Equity Funds

Abstract

This paper analyzes determinants of home bias in equity funds based on monthly holdings data using panel and quantile regressions. We investigate 699 equity funds, domiciled in fifteen European countries, that broadly invested in European stocks from January 2003 to December 2016. More than ninety percent of our sample funds show, on average, a home bias. In addition, the home bias across funds is quite stable over time. Analyzing the determinants of this home bias, our empirical results from panel regressions indicate that macroeconomic development, stock market development and fund-specific characteristics have, on average, a significant influence on the home bias of individual funds. Applying quantile regressions, we find the effects of several determinants, such as real growth in the gross domestic product, past excess return of the domestic stock market or number of stocks held by funds to be clearly related to the funds’ level of home bias. Further analyses of subportfolios of funds show that informational advantages do not seem to be a reason for the observed home bias.