The modern portfolio theory states that the asset composition, the allocation of money between various (mutually statistically independent) investment categories, leads to an increase in revenue. On the basis of this theory,. distribution of investment amounts in. portfolio across. multitude of national markets would be useful.
In practice, however, it is observed that investors invest. disproportionately large part of their assets in their respective home market. This effect is called the home bias. The effect was first described by Kenneth French and James M. Poterba (1991), as well as by Linda Tesar andIngrid Werner.
What causes home asset bias
The following aspects are mentioned as causes for the home asset bias:
Generally investors are relatively well informed about operating in the home market and therefore think they can assess the opportunities and risks. In foreign markets, investors usually have less information.
Exchange rate risk
The profit for investors is partly determined by the yield of the investment itself, but also by fluctuating the exchange rate. An investment in an area with the same currency is therefore risk-free.
Financial risk or extra administrative burden due to foreign withholding tax.