Australian investors' home bias in portfolio equity investment

Abstract

This paper employs International Monetary Fund’s high quality cross-border equity holdings dataset to investigate the determinants of home bias puzzle in the Australian context. This paper indicates that the share of destination countries’ stock market that is invested in Australia and transaction costs have significant impact on the home bias puzzle. Capital controls and trade links also impact the home bias puzzle; however their effect is insignificant. This paper also employs World Bank’s governance indicators and other legal variables to investigate the phenomenon of home bias. Information asymmetries arising due to countries’ regulatory and legal environment have significant impact on the home bias puzzle.