Are Investors Home Biased? Evidence from Germany [chapter]

Andreas Oehler, Marco Rummer, Thomas Walker, Stefan Wendt
2007 Diversification and Portfolio Management of Mutual Funds  
In most if not all countries the proportion of portfolio assets that investors allocate to foreign securities is clearly less than mean-variance analysis predicts -a phenomenon known as "home (asset) bias". Our research paper is one of the first that provides detailed analysis of this phenomenon in Germany. While research on this topic has mainly focused on equity, we include both, the bond and the stock market. Analyzing the data from the capital market statistics of the German Central Bank
more » ... man Central Bank and from annual reports of German mutual funds, we find strong evidence for the home bias effect for private as well as for professional investors. Despite a substantial decline of this effect during the 1990s, German mutual funds still hold on average only 66% of their investments in non-German securities while the latter represent almost 95% of the worldwide market value for equities. We argue that the decline in the home bias is a result of improved (and cheaper) access to information in recent years. The home bias of private investors is even worse. Besides this we document a "Europe bias", meaning that non-European countries, in particular Canada, Japan and the US are strongly underrepresented compared to our benchmark portfolio. Our results indicate that there is clear potential for portfolio optimization, not only for private but also for institutional investors. JEL Classification: F30, G11, G15 Abstract In most if not all countries the proportion of portfolio assets that investors allocate to foreign securities is clearly less than mean-variance analysis predicts -a phenomenon known as "home (asset) bias". Our research paper is one of the first that provides detailed analysis of this phenomenon in Germany. While research on this topic has mainly focused on equity, we include both, the bond and the stock market. Analyzing the data from the capital market statistics of the German Central Bank and from annual reports of German mutual funds, we find strong evidence for the home bias effect for private as well as for professional investors. Despite a substantial decline of this effect during the 1990s, German mutual funds still hold on average only 66% of their investments in non-German securities while the latter represent almost 95% of the worldwide market value for equities. We argue that the decline in the home bias is a result of improved (and cheaper) access to information in recent years. The home bias of private investors is even worse. Besides this we document a "Europe bias", meaning that non-European countries, in particular Canada, Japan and the US are strongly underrepresented compared to our benchmark portfolio. Our results indicate that there is clear potential for portfolio optimization, not only for private but also for institutional investors. JEL Classification: F30, G11, G15
doi:10.1057/9780230626508_3 fatcat:3bgjpaiso5fr7aw22iom6ltvtu