International Capital Flow And The ’Home Bias’ Puzzle

Although decentralization is famous in investment theory, there is obvious "Hme Bias " tendency in reality. Home Bias means that investors pay more attention to domestic capital market which is contradict with traditional diversification. The Home Bias Puzzle was first proposed by scholars in1990s, till now this phenomenon is still obvious today through it is more international and diversified time.On the base of Chinese and foreign papers, this paper chooses measurable indicators to analyze which factors that influence Home Bias tendency. We select investors’behavior data from2001to2010of twelve OECD countries’stock market and make specific analysis, then we come to two conclusions as follows:First, All these twelve countries’diversification in2010is higher compared with that in2001.The tendency in French, Germany, Greece, Italy and U.S rises more steeply that other seven countries. In fact, all of them experience more diversified investment in total. However, if we compare the weight invested in domestic capital with the weight of domestic stock market capitalization, even country with the highest diversification is still over centralized. For example, as the most developed capital market, US stock market’s capitalization is31.7percent of the world stock market in2010, the weight of domestic investment is76.3percent. In other words, Home Bias is still exist.Second, Home Bias is decreasing. Own country’s stock market proportion is not the only element when investors make their investment decision, there are also information asymmetry, immigration, rising of emerging market and some other factors. This paper chooses five indicators as explaining variables to construct empirical model, these five indicators are own country’s stock market proportion, institutional investor’proportion in domestic investors, broadband rate, immigration rate and emerging countries’stock market proportion. The empirical result shows that investors’diversification has negative relationship with own country’s stock market proportion, and positive relationship with institutional investor’proportion and broadband rate. In one sentence, the optimal investment theory is not fully practiced in reality, other factors such as information asymmetry will also influence the investment choice. However, objective factors can not completely explain the Home Bias Puzzle. In this paper, we take further step in psychological theory to explain the confusing puzzle.There is some shortcomings in the empirical model of this paper, such as the coefficient of immigration rate is non-significant. We can pick up "pure immigration rate" to replace the immigration rate to get more accurate outcome. Due to data availability, we just stop here. And, the explanation from psychology is lack of data support and less persuasive.We discuss the Home Bias Puzzle because it is related to Chinese capital market. With the open of capital account and promotion of CNY internationalization, on one hand, the capital outflow with hedge may be not a big problem. On the other hand, capital inflow is cautious and careful, thus the concern of currency appreciation due to large scale capital inflow may be not necessary.