L3

Question 1

Home BIAs

Answer 1

Local investors hold a disproportionately large share of local assets compared to global, even though they can diversify

Question 1

Why people avoid foreign stocks

Answer 1

1. direct barriers-
2. indirect: info asymmetry

Question 1

direct barriers

Answer 1

capital market measures: legal restiction
diff in tax treatments between home and foreign investors
transaction cost with trading foreign equities

Question 1

indirect:

Answer 1

info asymmetry
riskiness of foreign stocks- hard to get credible information to evaluate stock:
* inconsistent accounting standards,
* lack of stringenet disc requ,
* absence of efficent regulatory enviroment

Question 1

is home bias disappering

Answer 1

no, despite fall of tc and removal of investment and info barriers

*because of higher correlation between stock markets, weakens international diversification- investors see less advantages of invest in internationally

*because of 3 behavioral based explanations
1. familiarity
2. optimism
3 ambiguity

Question 1

Familiarity Bias

Answer 1

unfamiliar with foreign stocks, invest think they are risky

Question 1

Optimism Bias

Answer 1

Invest have high expectations about rates of return on domestic stocks relative to foreign

Question 2

Ambiguity aversion

Answer 2

investors see foreign stocks like bets

Question 3

Why is home bias a puzzle in finance?

Answer 3

contradicts principles of diversification- investors should spread their investments across different markets to reduce risk. However, many investors exhibit a strong preference for domestic assets.

Question 4

how is home bias measured:

Answer 4

the diff between the share of domestic stock holdings in domestic investors portfolios and the share of domestic stock in the world market portfolio