Home Biased: A Case for More Indexing

This interesting article from Victor Haghani and James White suggests that, given some initial assumptions about investor wealth distribution, the dominant size of the U.S. market (50%) relative to the world market coupled with U.S. home-country bias (80% invested in domestic equities) actually gives rise to higher U.S. market valuations, and lower expected long-term returns. This is the case in spite of the fact that smaller market investors exhibit relatively higher home-country bias (50% invested in domestic equities in markets 5% the size of the world market cap).

How would this apply to countries with extreme home-country bias like the Philippines? If we have a total world market worth $100, with a 50% US market with 80% home-country bias, 10 smaller 4.9% markets with 50% home bias, and a 1% Philippine market with 99% home bias, the calculation would yield that there would be an excess $0.45 demand in a Philippine market that would otherwise have been worth only $1. It would appear that extreme home-country bias in such a small market like the Philippines also has the effect of pushing market valuations higher due to increased demand.

Read Global Impact of Investor Home Country Bias for more discussion on Haghani and White’s article.

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