The Cost of Home Bias - Empirical Evidence and Implications for Stock Market Participation

Abstract

Empirical studies on household portfolios uniformly document a strong home bias in private investors' portfolios. This paper uses both parametric and historical simulation techniques to quantify the cost induced by home bias. Our results reveal major country-specific differences in the benefits derived from international diversification. While we find a detrimental effect of home bias on portfolio performance for German investors, the effect for US investors is rather small in magnitude. We show that an increased awareness of the benefits of international diversification might positively affect the decision of individual investors to participate in the stock market.