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Home Country Bias: Does Domestic Experience Help Investors Enter Foreign Markets?

Margarida Abreu (), Victor Mendes () and João A. Santos

No 2010/02, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: This paper investigates whether investors' domestic experience helps them enter foreign markets. We show that investors first invest in domestic securities and only some time later they invest abroad in foreign securities. We also show that investors who trade more often in the domestic market start to invest abroad earlier. Our findings suggest that the experience investors acquire while they trade in the domestic market is a key reason why active investors enter the foreign market earlier. A reason is that highly educated investors as well as investors with more financial knowledge, arguably those for whom learning by trading is the least important, do not need to trade as much in the domestic market before they start investing in foreign securities. Another reason is that investors who start investing in foreign securities are able to improve on their performance afterwards. This improvement in performance constitutes further evidence that the home country bias is costly, thereby confirming that there are gains for investors from investing abroad.

Keywords: Learning; home country bias; duration analysis. (search for similar items in EconPapers)
JEL-codes: G11 G15 F30 (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-ifn
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Journal Article: Home country bias: Does domestic experience help investors enter foreign markets? (2011) Downloads
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More papers in Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa Department of Economics, ISEG - Lisbon School of Economics and Management, Universidade de Lisboa, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL.
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