Investors are known to exhibit home (local) bias even when they invest in their domestic markets. Since home bias is symptomatic of market segmentation, the ‘home bias at home' phenomenon raises an important question: How well integrated are domestic financial markets? The answer for this question will have implications for a wide range of financial decision makings, including the cost of capital estimation, asset allocation, and performance evaluation. In the current paper, we address this question by estimating the level and trend of integration of U.S. domestic stock markets. Specifically, for each of our sample states, we construct the state (market) portfolio comprising public firms headquartered within the state and compute R-squares, our measure of integration, from regressing state portfolio returns on national stock market factors. Using weekly returns, we estimate the regression for each year of our sample period 1964-2010. The key findings are: (i) For the majority of sample states, the R-squares exhibits a statistically significant upward trend, implying that U.S. domestic stock markets were not fully integrated and have been integrating during the sample period; (ii) consistent with the previous result, the explanatory power of the state factor over individual stock returns has been decreasing for the majority of states; and (iii) the increasing integration of U.S. domestic stock markets is associated with the decreasing home state bias, suggesting that investors' pursuit of nation-wide investment opportunities may be a significant driver of domestic financial integration
