Home bias among institutional investors:: a study of the Economist Quarterly Portfolio Poll

I study the home bias pattern in international portfolios recommended by global financial institutions. These recommended portfolios from the Economist Quarterly poll provide an interesting research opportunity because transaction costs and other observable barriers in cross-border portfolio investments do not interfere with asset allocation decisions of the polled institutions. Thus, an examination of this poll data can shed light on the role of unobservable factors in international portfolio investments. I find that the institutions tilt recommendations towards their home markets; they change home market weights more frequently relative to other market weights or relative to institutions from other countries; and they change weights of geographically distant markets less often than other market weights. Overall, the evidence from the analysis suggests that home bias can arise from unobservable factors such as information asymmetry and investor optimism. (C) 2004 Elsevier Inc. All rights reserved.