Abstract:

Despite the potential gains and the easier access to financial markets worldwide (Baele and Inghelbrecht, 2009; Chiou, 2009), international portfolio diversification has not been as fully embraced as expected. Investors reveal a tendency to prefer domestic over foreign equities and international diversification gains have not been widely exploited by investors due to the so-called “home bias”. A considerable number of articles have recognized and proved Home bias as a common phenomenon in world financial markets and this puzzle is no longer discussed from the point of view whether it really exists. Studying the sources of this phenomenon, authors distinguish Institutional and behavior-based explanations. The first stream tries to explain the home bias as a result of imperfection in financial markets and the second stream explains the puzzle from the perspective of imperfection of investors.