Browsing by Subject "Equity Investing"

Investors tend to allocate large shares of their portfolios to their domestic equity. Domestic equity seems to attract investors all around the world more than foreign equity does. This phenomenon, usually called equity home bias, seems to persist even if many international capital market restrictions have been lifted. In this thesis I examine this topic from three different points of view. The first part examines what are the benefits of international diversification of equity portfolios. I study this issue by using historical stock market index data and related literature. I conclude that the lack of international diversification of equity portfolios is suboptimal for risk averse investors in a theoretical framework, as we assume that there are efficient markets, similar taxes and costs. The second part examines the observable level of equity home bias across nations. I answer this question by presenting calculated EHB-values from a research article and compare these values with gross domestic product per capita values and a variable indicating capital market restrictions. I find both of these values to be significant explainers for EHB-value. In the third part, I analyse the cause of equity home bias with the aid of academic studies in the fields of behavioral finance and cognitive psychology. I present possible behavioral and institutional explanations and evaluate the plausibility of those. I conclude that the institutional explanations are likely to explain a significant proportion of equity home bias in developing countries, while the behavioral ones provide a more plausible explanation in developed countries, as the institutional explanations cannot explain as much of the equity home bias in developed countries.