Home bias and purchasing power parity: evidence from the G‐7 countries

Abstract

Recent studies in the international economics literature emphasize the role of home bias in explaining a number of empirical puzzles. In the present study, we test for the following hypotheses: (i) that a home bias effect, which is nevertheless falling over time as traded goods markets become more integrated and consumption preferences become more similar across developed countries, influences the relationship among nominal exchange rates, domestic and foreign prices, and (ii) that incorporation of the home bias effect in the empirical specification of PPP enhances the robustness of the theory. We perform a panel data analysis using quarterly observations for the G-7 economies in the post-Bretton Woods era. The results confirm our hypotheses. Copyright © 2007 John Wiley & Sons, Ltd.

Home and foreign investor sentiment and the stock returns

“…This feature is studied by Coval and Moskowitz (1999) who show that American investors exhibit a strong preference for locally headquartered, small and highly levered firms. It is also documented by extant empirical literature in international market (Mylonidis andSideris, 2008 andXing andLi, 2011). …”

Determinants of Foreign Investors’ Home Bias in the Vietnamese Stock Market

“…Amadi (2004) revealed a significant decline in home bias due to the increasing popularity of the internet and mutual funds. Mylonidis and Sideris (2008) stated that home bias has diminished due to international integration. Although the explicit barriers to international portfolio investment have been significantly reduced or even eliminated, FPI is still too limited and far below the level proposed by MPT.…”

Optimum currency areas, structural changes and the endogeneity of the OCA criteria: evidence from six new EU member states

“…5 A number of reasons have been offered in the literature to explain the empirical failure of PPP at its strong version (for a survey, see, inter alia, Taylor, 2006). The reasons include: problems due to productivity differentials -the Balassa-Samuelson effect -(see, inter alia, Lothian and Taylor, 2008) measurement errors, (see, inter alia, Taylor, 1988), aggregation problems (see, inter alia, Taylor, 2001), the effects of interventions in the foreign exchange markets, (see, inter alia, Sideris, 2008), the effects of home bias (Mylonidis and Sideris, 2008).…”