Why Did the Equity Home Bias Fall During the Financial Panic of 2008

Abstract

Theories of home bias and of portfolio choice under uncertainty both predict that the home bias should increase during a financial crisis. In contrast to these theories, using a sample of 45 countries, I document that the equity home bias fell during the financial panic of 2008. Disentangling the active and passive components of portfolio holdings, I find that investors actively increased their home bias, but passive valuation changes subsumed these trades and reduced the home bias. Across countries, portfolio rebalancing, increased information asymmetries, and familiarity bias played distinct roles in investors’ international portfolio reallocations during the crisis.