EQUITY HOME BIAS PUZZLE BETWEEN MACRO-FINANCE INTERFACE AND RISK-FACTORS INTERFERENCE

Through this article we shed light on equity home bias puzzle in the current global finance area. We aim to see where the problem lies and to highlight, theoretically and practically, its determining factors. In that framework, a sample of developed and developing markets is studied using annual frequency data over the period 2001 to 2007. By means of dynamic panel data approach, we find that equity home bias is closely associated with both local and global risk factors (risk-factors interference) and it's a matter of the macro-finance interface. Indeed, it rises with domestic economic growth, industry value added, local PER and momentum effects on domestic markets. However, it falls with the rising local inflation, trade openness, national systematic risk and cross-border capital flows. As for the value added of the paper, we confirm the rise of global risk factors and, then, the interference between idiosyncratic and common factors. Moreover, specification tests enable as to verify the suitability of the selected variables and corroborate the mild-segmentation hypothesis. We state that our findings provide a potential usefulness for portfolio managers and domestic governors who plan on improving their attractiveness indices.