Equity home bias in space and time

Thesis

Equity home bias (EHB) remains one of the most enduring puzzles in international finance. Despite the dominant narrative of deepening global financial integration over recent decades, investors continue to systematically overweight domestic equities, thereby foregoing the benefits of international diversification. Within the neoclassical finance tradition, EHB is typically regarded as a transient anomaly expected to dissipate as markets integrate and arbitrage opportunities are exhausted. In contrast, this study posits that EHB is a structural feature of international finance, sustained by clustering across space and path dependence through time. It addresses four guiding questions: how EHB is defined; how it is measured; whether clustering is present across neighbourhood structures; and whether, if present, such clustering persists in path-dependent ways.

The empirical chapters address these questions in turn. A Systematic Literature Review is undertaken in Chapter 2, showing that definitions of EHB fall into three forms (model-based, data-based, and hybrid), each derived from the neoclassical finance tradition that reduces space to domicile and time to an ordinal sequence. Drawing on data for 43 countries over the period 2001 through 2020, Chapter 3 constructs a panel of EHB estimates across the three forms and applies a non-parametric Quantile Shift Function, demonstrating that the distributions are statistically indistinguishable and that measurement debates are largely inconsequential. Chapter 4 computes the Global Moran’s Index and Local Indicators of Spatial Association (LISA) for the panel’s International Capital Asset Pricing Model series, finding that EHB is systematically clustered. Employing both Transition LISA and Directional LISA methodologies, Chapter 5 demonstrates that EHB clusters are persistent through time, with the directional results indicating a predominantly downward trajectory, particularly after the Global Financial Crisis.

By addressing the EHB puzzle through its definition, measurement, presence, and persistence, the study offers novel empirical insights with clear implications for theory and practice. The impact of financial integration has not been uniform, with clustering and path dependence associated with negligible EHB levels in European developed markets while reinforcing persistently high EHB in Asia’s emerging markets. Likewise, the results confirm that the production of returns is systematically conditioned by neighbourhood structures, which dynamically shape the patterns of portfolio diversification. In short, investing is inherently geographical, structured through the intersection of space and time.

Authors: Drew, ME

• DOI: 10.5287/ora-y06e12xrj
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Subjects: Financial geography; Equity home bias