The World Price of Home Bias

60 Pages Posted: 4 Dec 2009

See all articles by Sie Ting Lau

Sie Ting Lau

Nanyang Technological University (NTU) - Division of Banking & Finance

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: November 28, 2009

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.

Keywords: Mutual Funds Holdings, Cost of Capital, Market Segmentation, Home Bias

JEL Classification: G11, G12, G23

Suggested Citation

Lau, Sie Ting and Ng, Lilian and Zhang, Bohui, The World Price of Home Bias (November 28, 2009). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1517472

Sie Ting Lau

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore
65 790 6051 (Phone)
65 791 3697 (Fax)

Lilian Ng

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Bohui Zhang (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

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