Measures of equity home bias puzzle : Australian evidence

The paper develops measures of home bias for 41 countries from Australian investors' perspective, over the period 2001 to 2012, by employing various models: International Capital Asset Pricing Model (ICAPM), Mean-Variance, Minimum-Variance, Bayes-Stein, Bayesian and Multi-Prior. ICAPM country portfolio weights are computed relative to world market capitalization. Bayesian model allows for various degrees of mis-trust in the ICAPM and Multi-Prior model's investors' ambiguity aversion. Mean-Variance computes optimal weights by sample estimates of mean and covariance matrix of sample return and Bayes-Stein improves precision associated with estimating the expected return of each asset. Paper finds that size, foreign listing, exchange rate volatility, idiosyncratic risk, turnover, stock traded, money and internet user have a significant impact on home bias. There are policy implications associated with Australia's home bias.