The Home Bias Phenomenon

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The Home Bias Phenomenon

• Home Bias and High Turnover
• By Linda Tesar and Ingrid Werner 1995
• Given the benefits of International Investing,
  how much foreign securities do domestic investors
  own?

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National Stock Markets as a Share of Five-Country
Aggregate
Figures are the end-of-year capitalized value of
each countrys equity market as a fraction of the
five-country total capitalized value.
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National Bond Markets as shares of Five-country
Aggregate
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StockBond Markets as a Share of Five-Country
Aggregate
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International Investment as shares of Market
Capitalization ()
The investment position in stocks and bonds is
the domestic investment position in foreign
equities as a fraction of the domestic stock and
bond market capitalization.
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Estimated Portfolio Weights on Foreign Security
Investments by US investors, 1970-1990 ()
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Estimated Portfolio Weights on Foreign Security
Investments by Canadian investors, 1975-1990 ()
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DOMESTIC Turnover Rates in International
Equities, 1989 (Bil)
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Turnover Rates in Foreign Equities held by
Domestic Residents,1989 (Bil)
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Table 2 Regression of ADR Basket Indices on IFCI
Indices Regression of equally-weighted ADR index
return on that of the foreign market index RADR,t
a b RFOR,t ut .
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Table 3 Tracking Error for the SP100 Sample
Period is August 1, 1994 to July 31, 1995 Stocks
are largest constituents of index Tracking error
defined as annualized standard deviation of
difference in returns between subset of stocks
and the SP 100 index
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Table 4 Tracking Error of ADR Baskets versus IFCI
Indices Tracking error defined as annualized
standard deviation of difference in returns
between ADR basket for a country and
corresponding IFCI index
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Table 5 Correlation between ADR Basket, IFCI
Index, and SP 500 Sample Period is August 1993
to July 1995
Note ADR basket has 61 stocks IFCI index has
890 stocks
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Conditional Correlations

• The conditional return correlations between the
  foreign market indices and various
  diversification portfolios based on US traded
  assets are illustrated below.
• D2 denotes the diversification portfolio selected
  from three market Indices,12 industrial
  portfolios and 30MNCs.
• AD1 are D2 plus country funds
• AD2 is AD1 plus each countrys ADRs

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