Rosanne Vanpee

Home Bias in International Equity Portfolios: A Review

This paper reviews the recent literature on equity home bias - the empirical finding that people over invest in domestic stocks relative to the theoretically optimal investment portfolio. We cover different home bias measures and we illustrate the extent and the evolution of equity home bias both with recent portfolio holdings data and longer time series. Institutional-based and behavior-based explanations for the puzzle are considered and discussed. We conclude that none of the proposed theories can explain the full extent of the bias by itself, thus we argue that international portfolio choice should be explained by a mixture of rational and irrational behavior.

The Equity Home Bias Puzzle: A Survey

Home bias - the empirical phenomenon that investors assign anomalously high weights to their own domestic assets - has puzzled academics for decades. Financial theory predicts that an internationally well diversified portfolio of stocks and short-term bonds can reduce risk significantly without affecting expected return. Although the globalization of international equity markets has increased international investments, equity portfolios remain severely home biased today, and no single explanation seems to solve the puzzle completely. In this paper, we first provide a thorough description of the equity home bias phenomenon by defining, discussing, and applying the competing measures and presenting some estimates of the costs of under-diversification. Second, we evaluate the explanations for the equity home bias proposed in the literature such as information asymmetries, behavioral aspects, barriers to foreign investment, and governance issues, and conclude that each explanation on its own falls short, suggesting that the equity home bias probably reflects a combination of factors. Lastly, we review the implications of international under-diversification for portfolio formation and the cost of capital of companies.

What drives international equity and bond holdings? An empirical study

In this article, we explore tentatively and formally the differences between bond and equity home and foreign bias based on a large data set including developed and emerging markets for the period 2001 to 2010. We show that, unlike for equities, the international demand for bonds is mainly supply-side driven: bond home bias increases with a growth in public debt, while the underinvestment bias towards a foreign countrys bonds decreases if this country issues more (sovereign) debt. This explains the absence for a negative time trend in bond home bias while equity home bias has decreased over time, and similarly a decrease in foreign bond bias, which is not observed for equities. Besides variables being significantly more, less or incompatibly important for bond versus equity investment bias, we also determine variables to be exclusively relevant for bonds, like sovereign credit ratings and bank credit supply.

Mutual Fund Performance: A Market Efficiency Perspective

ABSTRACT This study reconciles existing literature on stock market efficiency and mutual fund performance by developing a framework to test whether fund managers are able to exploit market inefficiencies. We find a positive relationship between alpha and weak-form market efficiency. Most funds are unable to outperform the market systematically, although a few are able to exploit relatively inefficient markets. Top performing funds are characterised by a better management of downside risk in times of market distress, whilst simultaneously exploiting learning effects when markets return to equilibrium. By conditioning fund performance on the state of the underlying market, we propose a conditional alpha ratio, which helps to better understand fund performance and can improve the fund selection process for investors.

A Pure Measure of Home Bias

The literature on international equity holdings distinguishes between home bias (overweighting of home stocks) and foreign bias (relative underweighting for more ‘distant’ countries). The two biases can be integrated into one distance-based model. We define pure home bias as the excess of home bias relative to this model, and find pure home bias only in emerging markets. Countries with high tax rates and low credit standing have higher pure home bias, and more development comes with lower distance aversion. Methodologically, the choice of portfolio bias measure matters. We find the best measure to be a covariance-based measure relative to the world average. JEL classification: G15, G18, G30, G38, F3

My global fund portfolio is not yours: the effect of home bias on European- and US-managed convertible bond fund exposures

This paper shows that global convertible bond funds (CBFs) and their resulting equity-bond exposures are regionally biased. Global bond fund managers display home bias, resulting in CBFs that are not only tilted towards the home market but also reflect the different bond-equity exposures of European and US convertibles. More specifically we find that global funds managed by a European asset management firm are more bond-like than global funds managed by a US-based asset manager. Hence, investors have to account for the asset management companys origin to avoid that the performance of the fund and its correlation with other assets is not in line with investors ex ante expectations about globally managed portfolios. Our results also indicate that for investors of European-based CBFs this home bias has resulted in an ex post opportunity cost up to 1.38% per year, depending on the sample period.

Equity and Bond Exposure of Convertible Bond Funds: Region Matters

This paper shows that the characteristics of convertible bond funds (CBFs) differ considerably based on the regional asset allocation of the fund. More specifically, U.S. CBF returns correlate more strongly with equity returns, while European and Asian CBFs returns show a higher correlation with bond returns. This is a consequence of the finding that U.S. convertibles are more equity-like in nature than European and Asian convertibles, which are constructed more like a bond. Moreover, we show that global CBFs have different characteristics depending on the nationality of the asset management company. A global CBF managed by a European (U.S.) asset management firm exhibits more bond (equity) like features because portfolio managers tend to compose home biased portfolios. Our results have important repercussions for both investors and researchers, as the characteristics of a convertible bond fund will differ, not only based on the regional asset allocation of the fund, but also based on the domicile of the asset management firm. Thus, the performance of the fund and its correlation with other assets may turn out to be different from the investor’s ex ante expectations and expectations of fund managers and clients risk to be divergent.