Home-field advantage or a matter of ambiguity aversion? Local bias among German individual investors

Markus Baltzer, Oscar Stolper and Andreas Walter

The European Journal of Finance, 2015, vol. 21, issue 9, 734-754

Abstract: This paper investigates whether familiarity induced by ambiguity aversion can help explaining the local bias phenomenon among individual investors. Using geographic closeness as a proxy for investor familiarity, we find that investors pull out of (unfamiliar) remote stocks and pour into (familiar) local stocks during times of increased market uncertainty. Moreover, the magnitude of this 'flight to familiarity' increases in the spread of an investor's ambiguity (about expected returns) between local and remote stocks. Our results prove robust to a number of alternative explanations of local bias. Specifically, we rule out a 'home-field advantage', where investors are able to translate information advantages about nearby companies into excess returns on their local stockholdings. We conclude that individual investors' local bias is induced by ambiguity aversion in the portfolio selection process rather than a trading strategy based on superior information about local companies.

Date: 2015
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Citations: View citations in EconPapers (14)

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DOI: 10.1080/1351847X.2013.877514

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