Factors Affecting Home Bias in Developed and Developing Countries

According to the International Capital Asset Pricing Model (ICAPM), investors should hold the world market portfolio, which means that proportion of domestic assets in investor portfolio should equal to the share of domestic country in the world market capitalization. However, this is not present in real world, investors tend to hold a larger proportion of domestic assets compare to the benchmark. Chan, Covrig and Ng (2005) divide equity home bias into two main components: domestic bias (overweighting domestic assets) and foreign bias (under- or overweighting foreign assets). The present diploma paper concentrates on home bias phenomenon and its constituents as well as factors affecting it. This work estimates domestic and foreign biases in 42 developed and developing countries from 2001 till 2015. The conducted panel data analysis shows the significance of the following factors. Countries, that have higher economic freedom, higher economic and stock market size, better quality of corporate governance and are more informational advanced, exhibit lower level of domestic bias. At the same time, foreign bias decreases when country has lower level of capital flow restrictions, higher information availability, higher economic development, more liquid stock market and higher level of government effectiveness.