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Home Equity Bias and Industry Concentration

This paper examines aggregate domestic and foreign equity allocations around the world using CPIS data. We analyze the cross-country determinants of the domestic and foreign equity bias and the evolution over time of these biases and their determinants. Economic development, restrictions on foreign investment and international capital flow, stock market development and familiarity variables such as geographical distance are strong determinants of the equity biases. Moreover, our results show a positive relation between industry concentration and the domestic and foreign equity biases. Despite investors overweight domestic equities in industry-specialized countries, when they decide to invest abroad, they prefer to invest in countries with a diverse industry specialization relative to their home country. In contrast with the evidence based on stock market correlations, our findings support the view that foreign investors care about diversification opportunities.