Appraising home bias exposure

The home market bias is one of the clearest examples of behavioral biases among investors. It refers to the common preference of investors for a sizable allocation to their home market, even though this is generally suboptimal from the perspective of international diversification. One might expect this bias towards one’s home market to become smaller over time, in light of rising globalization.

This study¹ by FTSE makes an assessment of the current home bias for five large pension fund markets. The home market bias is found to be strongly present in all of them, with Australian investors topping the chart with an average allocation to Australian equities of 52% (versus 2% in the global equity index).

UK and Japanese investors have over one third of their equity portfolio in the home market, and Canadian investors over 20%. US investors also have a home market bias, although this appears less pronounced given that US stocks already represent over 50% of the global equity index. In sum, home market bias continues to be a deeply entrenched phenomenon.

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Quantitative Investing

David Blitz

Appraising home bias exposure

Footnote

From the field

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