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What is the Economic Cost of the Investment Home Bias?
Author(s) -
LEVY HAIM
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12400
Subject(s) - investment (military) , economics , foreign direct investment , monetary economics , macroeconomics , political science , politics , law
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.