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We study how misaligned language between the investor and the firm contributes to the underweighting of foreign securities in an international portfolio. In particular, we document a significant U.S. institutional investor bias ag...
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We study how misaligned language between the investor and the firm contributes to the underweighting of foreign securities in an international portfolio. In particular, we document a significant U.S. institutional investor bias against firms located in Quebec relative to firms located in the rest of Canada (ROC). The differential bias is surprising given that (i) Quebec and the other Canadian provinces share the same nationality, federal law, stock exchange, and accounting standards; (ii) their regulatory filings are prepared in English and French; and (iii) U.S. institutional investors are sophisticated and located close to Quebec and the ROC. We also examine Quebec firms with different levels of French versus English online presences as well as those with CEOs who have U.S. work experience or board members or financial analysts who reside in the United States. We find that each factor affects the relative underweighting of investment in Quebec versus the ROC. Finally, we contrast the holdings of institutional investors located in the United Kingdom and France to bolster our conclusion that incongruent languages contribute to the underweighting of Quebec firms relative to firms in the ROC.
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We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relative...
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We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relatively more domestic assets. Consequently, agents have larger claims to domestic over foreign consumption. Moreover, foreign assets turn over faster than domestic assets because the former have desirable liquidity properties, but represent inferior saving tools. Our mechanism offers an answer to a longstanding puzzle in international finance: a positive relationship between consumption and asset home bias coupled with higher turnover rates of foreign over domestic assets.
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The home bias like the disposition effect is a well-researched economic phenomenon in investor behaviour which has been examined in finance journal articles for decades. While there is little doubt about the existence of the bias,...
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The home bias like the disposition effect is a well-researched economic phenomenon in investor behaviour which has been examined in finance journal articles for decades. While there is little doubt about the existence of the bias, its magnitude varies across countries and investor groups. The home bias has to be regarded as a multifactorial phenomenon, a combination of numerous causes which all syner-gistically contribute. In contrast to other biases the home bias can at least partially be explained by reasons beyond irrational investor behaviour. While institutional restrictions play a minor role, informational asymmetries and superior information of domestic investors are important factors. Thus, the performance of investments may well benefit from a home bias, and the bias then no longer would be a puzzle but rather rational behaviour as a lower diversification level may lead to higher returns. The contemporary understanding of the home bias gains in relevance as the ongoing political debate in Germany has to clarify an institutional framework for long-run retirement savings plans of private households based on equity investments.
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Immigrants tend to buy products from their home countries. As a result, the more immigrants of a given ethnicity a country has, the more it will tend to import from those immigrants' countries of origin. This effect of migrant het...
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Immigrants tend to buy products from their home countries. As a result, the more immigrants of a given ethnicity a country has, the more it will tend to import from those immigrants' countries of origin. This effect of migrant heterogeneity is ignored by the standard gravity literature that assumes homogeneous preferences among resident consumers. This paper embeds that observed regularity into a structural gravity model. Gravity derived from the Almost Ideal Demand System generates bilateral trade shares with three distinct components: ethnic composition of the resident population, bilateral trade cost, and per capita income. Using international trade and transnational migration data among 40 countries, this paper estimates the home bias of each ethnic group in tastes. The results show that consumers' tastes for products from their country of origin deviate from unbiased levels by 35 percent on average. Ethnic taste bias is found to explain half of the trade bias. Counterfactuals suggest that anti-immigration policy significantly impedes trade with immigrants' countries of origin. (C) 2019 Elsevier Ltd. All rights reserved.
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Overinvesting domestically is well known as an investment home bias (IHB). We define an economic home bias (EHB), whereby the IHB measures the investment weights and the EHB measures the economic cost induced by the IHB. We may ha...
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Overinvesting domestically is well known as an investment home bias (IHB). We define an economic home bias (EHB), whereby the IHB measures the investment weights and the EHB measures the economic cost induced by the IHB. We may have a large IHB and a negligible EHB. With the increase in the average correlation between foreign markets from 0.4 for the decade ending in 1988 to about 0.9 for more recent decades, the U.S. EHB is becoming negligible despite the domestic investment of 77.5%. Since 2009, the correlations have decreased, indicating that the HB puzzle is emerging once again.
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This paper expands the current literature on home bias and in country home bias especially, in five ways: (a) it analyzes an unexamined market, that of Italian occupational pension funds; (b) it considers three asset classes: gove...
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This paper expands the current literature on home bias and in country home bias especially, in five ways: (a) it analyzes an unexamined market, that of Italian occupational pension funds; (b) it considers three asset classes: government securities, corporate bonds and equities; (c) it examines the choices made by professional managers; (d) it checks whether the presence of Italian home bias is influenced by the benchmark or not and (e) it examines whether Italian home bias influences Italian asset managers and if it is also identifiable in the case of coacting management in the presence of one or more Italian asset managers. The results obtained demonstrate that home bias is a phenomenon that can be argued to exist in Italian occupational pension fund asset manager's asset allocation. The results of this research tend to show that when the asset manager is Italian, single or coacting, the choice falls on Italian asset classes. Finally, the home bias phenomenon could be considered an element for containing volatility in the prices of government securities, corporate bonds and equities because of the constant demand created on the market by the asset managers affected by this bias.
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The present study examines a specific type of referee biases, home bias, and analyzes how the presence of fans affects home bias by using NBA games played in empty arenas during the COVID-19 pandemic in the 2020–2021 season and m...
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The present study examines a specific type of referee biases, home bias, and analyzes how the presence of fans affects home bias by using NBA games played in empty arenas during the COVID-19 pandemic in the 2020–2021 season and matches played before the pandemic from 2017 to 2020. This research also uses a unique data set from NBA Last Two Minute Reports to assess referees’ performance at the play level. The findings show crowd support does not cause referees to treat home and away teams differently in crucial situations during the NBA regular season, contrary to the results in most prior studies.
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Following the launch of the Euro in 1999, integration among Euro area financial markets increased considerably. As a result, portfolio home bias declined across the European financial markets. However, greater market integration h...
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Following the launch of the Euro in 1999, integration among Euro area financial markets increased considerably. As a result, portfolio home bias declined across the European financial markets. However, greater market integration has generated a new bias: portfolio Euro bias, a situation where Euro investors tend to hold large proportion of assets issued within the Euro region. The first part of this paper presents an empirical analysis of the economic factors at play behind the switch from home bias to Euro bias. We find that decline in default risk and transaction cost are two key determinants of the rise in portfolio Euro bias. The second part of the paper goes deeper into the effects of Euro bias on Euro area bond and equity markets. We observe that both government and corporate bond markets revealed clear signs of strain during the recent financial turmoil. Our results also reveal that the risk-reduction potential from geographic diversification within the Euro equity market is lower than that of the Euro sector diversification.
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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 2004 to 2010. We show that, unlik...
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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 2004 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 country's 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.
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We document a new investor preference we call the home-institution bias. Whereas the home-asset bias is a preference for domestic assets, the home-institution bias is a preference for domestic financial institutions. Our data come...
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We document a new investor preference we call the home-institution bias. Whereas the home-asset bias is a preference for domestic assets, the home-institution bias is a preference for domestic financial institutions. Our data come from Sweden's government-mandated retirement system. In cross-fund regressions, we find that funds offered by Swedish institutions received around 10 times more money than similar funds offered by foreign institutions. We show that this preference for home institutions is distinct from the home-asset preference, is not driven by information asymmetries, and is consistent with an underlying preference by individuals to deal with the familiar. Cross-individual regressions also support a behavioral explanation because the home-institution bias is strongest among financially-unsophisticated and provincial investors.
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