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Why did the equity home bias fall during the financial panic of 2008?
Author(s) -
Wynter Matthew M.
Publication year - 2019
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12754
Subject(s) - economics , portfolio , equity (law) , financial crisis , stock (firearms) , monetary economics , valuation effects , valuation (finance) , financial economics , sample (material) , finance , macroeconomics , political science , law , mechanical engineering , chemistry , chromatography , engineering
Investors tend to put most of their wealth in local stocks; theories of portfolio choice and uncertainty aversion jointly predict that this home bias should increase during a financial crisis. Yet, using a sample of 45 countries, I document that the equity home bias fell during the financial panic of 2008. Exploiting bilateral stock holdings, I find that investors actively increased their home bias, but large valuation changes subsumed these trades. Across countries, the change in home bias is consistent with partial portfolio rebalancing and increased information asymmetries during the crisis.