The world price of home bias

Sie Ting Lau, Lilian Ng, Bohui Zhang

Research output: Contribution to journalArticlepeer-review

71 Citations (Scopus)

Abstract

Theoretical arguments suggest that as the degree of a country's home bias increases, the global risk sharing between domestic and foreign investors will reduce and thereby increase the country's cost of capital. Consistent with this prediction, we find international differences in the cost of capital to be strongly and positively related to varying degrees of home bias for 38 markets. This finding is robust to different cost of capital proxies, different control variables, alternative home-bias measures, international tradability of stocks, and alternative specifications. Therefore, the overall evidence implies that countries may enjoy a significantly lower cost of capital by reducing the extent of their home bias and hence, increasing global risk sharing.
Original languageEnglish
Pages (from-to)191-217
Number of pages27
JournalJournal of Financial Economics
Volume97
Issue number2
DOIs
Publication statusPublished - Aug 2010
Externally publishedYes

Keywords

  • Mutual fund holdings
  • Cost of capital
  • Market segmentation
  • Home bias

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