The determinants of home bias puzzle in equity portfolio investment in Australia

Over the past decade, there has been an increasing trend toward financial integration experienced by countries with the removal and relaxation of controls on cross-border investments. However, despite the well documented gains from international diversification, investors continue to have a strong preference for domestic assets. This paper characterizes the salient features of the composition of Australia equity portfolio investment. In addition, the paper investigates the determinants of Australian investors’ home bias in equity portfolio investment. Employing a disaggregated dataset of Australian investors from the Coordinated Portfolio Investment Survey (CPIS) conducted by IMF for the year 1997, 2001, 2002, 2003, 2004 and 2005, we provide an insight into the causes of the home bias puzzle by empirically investigating the role of explicit barriers to international investment (capital controls and transaction costs) and implicit barriers (governance and information asymmetries).