Equity Home Bias - A Global Perspective

This paper provides a global perspective on equity home bias using MSCI country and world index (returns) data for 39 countries for the period 2000 – 2009. Two measures of home bias, namely, diffuse priors based I-CAPM measure, and, BayesStein shrinkage based mean-variance measure are used. The I-CAPM is tested and holds for the country sample. The estimated optimal equity investment weights arising from the single factor ICAPM prove highly sensitive to the world market excess returns. The Bayes-Stein shrinkage estimator reduces parameter uncertainty through Bayesian shrinkage of the equity investment allocation parameters. Shrinkage estimation results in more acceptable values of home bias, particularly for the USA. We find that developed economies in the Euro zone display lower equity investment home bias compared to the emerging economies. Australia displays moderately high equity home bias which is similar to that of Canada, Japan and USA, and higher than that of the developed Euro zone economies. The system GMM procedure of panel analysis reveals that country idiosyncratic risk, country financial structure and country institutional quality constitute the three most important determinants of global equity home bias over the last decade. Policy options and their implications are discussed.