How have the institutional and behavioral factors behind patterns of Home and Foreign Biases impacted investment portfolios and diversification ?

Abstract

Home Bias Puzzle as often called intrigues researchers since decades leading them seeking explanations for it. In this thesis, we study the preference for domestic stocks and other deviation from optimal allocation of continental European investors between 2001 and 2022. We perform several regressions and principal component analyses to test the relevance over time of the justifications for those biases from the literature. First, we prove that financial literacy, tax burden, investor age, information asymmetry, economic growth, recent stock market return and market size are explanations for the Home Bias that hold across time. Second, we explore the linking factors leading to disproportionate investment in the Foreign Bias. We confirmed the role of distance, culture, shared languages and religion as serving as proximity measurements, physical or psychological.