What is the Economic Cost of the Investment Home Bias?

Overinvesting domestically is well known as an investment home bias (IHB). We define an economic home bias (EHB), whereby the IHB measures the investment weights and the EHB measures the economic cost induced by the IHB. We may have a large IHB and a negligible EHB. With the increase in the average correlation between foreign markets from 0.4 for the decade ending in 1988 to about 0.9 for more recent decades, the U.S. EHB is becoming negligible despite the domestic investment of 77.5%. Since 2009, the correlations have decreased, indicating that the HB puzzle is emerging once again.