Home Bias Puzzle - Research Paper Example

This is due to the fact that changes in the domestic economic environment are less likely to affect the investments in international markets. Jeske (2001, p. 37) explains that portfolios which are invested outside the domestic market are not considered to be risky because the risk of the investment is distributed in several markets. The reasons why the home bias is common among investors raise puzzles among economists. This paper analyzes the explanations for home bias and evaluates the reason why it is convincing, which makes it a continuous phenomenon in finance and investment economics.

There are various barriers to the flow of capital across nations due to less or lack of economic integration. Sendi and Bellalah (2010, p. 78) assert that this explains the home bias of investors. The economic barriers include restrictive economic laws, high information costs, international taxation, high transaction costs and political boundaries which affect foreign investment. This illustrates that investment in foreign equities is costly to the investors and their propensity for domestic investment.

These barriers seem convincing as a valid justification for home bias. However, the home bias puzzle continues because the bias continues even after the removal of these restrictions in the modern global economy. Shikuan and Cheng-Da (2011, p. 1