Non-fundamental home bias in international equity markets

Abstract

This paper examines the home bias in the international equity market using 1) the country-level behavioral factor and 2) the home-foreign return correlation. Specifically, we use responses to the question regarding the level of trust toward strangers as a measure for the behavioral factor that we call country-specific unfamiliarity. The empirical results based on the data from eleven developed countries suggest that country-specific unfamiliarity has a significant and positive correlation with the equity home bias. On the other hand, we find that the home-foreign return correlation is negatively correlated with the equity home bias, which goes against our hypothesis. We check for the robustness of our empirical analysis by fitting alternative specifications and using a log-transformed measure of the equity home bias.