Home bias and determinants of home bias: an investigation for Turkey

However, despite the dramatic increase in cross-border securities trading and the removal of many formal barriers to international investment during the past decades, investors still overweight domestic stocks in their portfolios. This phenomenon, referred to as the home bias or domestic bias, that continues to be a puzzle in the financial literature, is inconsistent with standard asset pricing theory and runs counter to the benefits of international diversifications of equity portfolios. Numerous institutional and behavioral explanations have been advanced for the home bias but psychological biases remain the most likely candidates to explain its persistent magnitude. The aim of this research is to analyze the determinants of the equity home bias for Turkish investors. In this context, the roles of exchange rate risk, direct costs, familiarity, cultural factors, corporate governance, stock market characteristics and economic features as factors causing homes bias were examined for 20 target countries invested in between 2001 and 2010. Panel Regression Anaysis is employed to examine the impact of seven factors proxied by 15 variables on the dependent variable, equity home bias, calculated using International Capital Asset Pricing Model as a benchmark. Analysis results suggest that main determinants of Turkish investors home bias in international equity investments are familiarity and cultural factors. Besides, foreign trade volume as a proxies for economic development and withoulding tax rate as a proxies for direct costs slightly affect the foreign equity investment decisions of Turkish investors. Turkish investors prefer to allocate their stocks investment in countries that are familiar and culturally close even if these markets are deprived of the possibility of diversification, geographically distant and frontier markets with weak corporate govarnance. These findings revesals that Turkish investors tend to be affected by behavioral factors rather than institutional factors in international equity investments. Exposing to high information cost or having perception of informational disadvantage in unfamiliar markets caused to move Turkish investors away from foreign investments.