1. Liberalism and Home Equity Bias
Evangelos Benos
Marek Jochec
ISCTE Business School, 2013
Liberalism and Home Equity Bias

2. Liberalism and Home Equity Bias
Preview of Results
Countries whose citizens have liberal ideals are less biased toward domestic equity.
one stdev increase in the level of economic liberalism
--> 5% decrease in home equity bias
one stdev increase in the level of social liberalism
--> 2% decrease in home equity bias
Liberalism and Home Equity Bias

3. Methodology (in a nutshell)
Panel of 30 countries (major developed economies and some developing countries, too), over the period of 25 years.
Panel-data regression with:
Y-variable: home-bias measure (a standard established in the literature)
X-variables: proxy for liberalism, plus standard controls
Liberalism and Home Equity Bias

4. Liberalism and Home Equity Bias
Methodology (detail)
List of countries:
Liberalism and Home Equity Bias

5. Methodology (detail – cont.)
Measure of home equity bias in year t :
where Market Cap is the country’s market capitalization,
and Domestic Holdings are defined as:
where
Foreign Assets = the amount invested by residents in foreign equities
Foreign Liabilities = the amount invested by foreigners in domestic eqts
Liberalism and Home Equity Bias

6. Methodology (detail – cont.)
Measuring Liberalism:
We use the responses to specific questions in the World Values Survey (WVS:
- administered by social scientists in 78 countries, to a minimum of 1,000 individuals per country, over four time periods: , , and (since questions are not asked every year, we substitute missing values with past values until an update is available).
Liberalism and Home Equity Bias

7. Methodology (detail – cont.)
Measuring Economic Liberalism:
Proxied by answers to questions assessing the degree of government involvement in economic affairs.
Question’s preamble: “Now I'd like you to tell me your views on various issues. How would you place your views on this scale? 1 means you agree completely with the statement on the left; 10 means you agree completely with the statement on the right; and if your views fall somewhere in between, you can choose any number in between. Sentences:”
Question e036: ”Private ownership of business should be increased vs. Government ownership of business should be increased.”
Question e037: ”People should take more responsibility to provide for themselves vs. The government should take more responsibility to ensure that everyone is provided for.”
we define the measure of economic liberalism of country c in year t ELc,t as a simple average across the individual answers to the two questions (with an inverted scale).
Liberalism and Home Equity Bias

8. Methodology (detail – cont.)
Measuring Social Liberalism:
Proxied by answers to questions assessing the tolerance of homosoxuality, abortion, and divorce.
Question’s preamble: “Please tell me for each of the following statements whether you think it can always be justified, never be justified, or something in between.” (1 = never justifiable; 10 = always justifiable)
Question f118: ”Homosexuality”
Question f120: ”Abortion”
Question f121: ”Divorce”
we define the measure of social liberalism of country c in year t SLc,t as a simple average across the individual answers to the three questions.
Liberalism and Home Equity Bias

9. Methodology (detail – cont.)
Control variables:
CapC = proxy for the transaction barriers in foreign investment (0-1; average of several dummies from IMF Annual Reports on Exchange Arrangements and Exchange Restrictions)
MarCapN = sum of the market capitalizations of neighboring countries (proxy for information acquisition cost)
Sharpe = Sharpe ratio of the country (used to capture the relative quality of domestic investment opportunities)
IMS = % of foreign-born residents (proxy for “familiarity” with foreign capital markets)
PAT = an average (inverted) score on question g006 (“How proud are you to be [Nationality]?”) in WVS (following Morse & Shive, 2008)
Liberalism and Home Equity Bias

10. Summary Statistics – home equity bias
Liberalism and Home Equity Bias

11. Summary Statistics – economic liberalism
Liberalism and Home Equity Bias

12. Summary Statistics – social liberalism
Liberalism and Home Equity Bias

13. Summary Statistics – control variables
Liberalism and Home Equity Bias

14. Summary Statistics – correlations
Liberalism and Home Equity Bias

15. Regression Characteristics
Country fixed effects
Need to control for unobservable country-specific characteristics that potentially affect the level of the home equity bias (e.g. differences in per capita income, literacy, ect.)
Time fixed effects
Need to control for time-variant characteristics that affect the home equity bias (e.g. development of electronic trading technology, liberalization waves)
Liberalism and Home Equity Bias

16. Liberalism and Home Equity Bias
Results
Country and time fixed effects specification (the three social liberalism questions and two economic liberalism questions used separately):
Liberalism and Home Equity Bias

17. Liberalism and Home Equity Bias
Results
Country and time fixed effects specification (the averages of the three social liberalism questions and two economic liberalism questions are used; Panel B shows coefficients and p-values of selected year dummies):
Liberalism and Home Equity Bias

18. Liberalism and Home Equity Bias
Results
Cross-sectional regression in the spirit of Morse & Shive (with year dummies):
our conclusion: although in the cross section patriotism is associated with higher levels of home equity bias, changes in the level of patriotism are associated with changes in the opposite direction of the home equity bias.
Liberalism and Home Equity Bias

19. Liberalism and Home Equity Bias
Negative coefficient on Patriotism?
Our results do not necessarily contradict those of Morse & Shieve. MS do not include year dummies: They get positive relationship: more patriotism -> more HEB.
There may be a general time trend: Something driving both patriotism and HEB, with generally positive relationship (captured by MS).
This general time trend (that affects all countries) is captured by our year dummies.
Our coefficient on Patriotism captures the incremental effect, “on top of” general time trend: this effect can be negative. Think of increases in disposable income causing optimism; higher optimism leads to more patriotism, higher disposable income leaves more money to invest abroad.
Liberalism and Home Equity Bias 19

20. Dataset variations: LA excluded (5 out of 30 countries)
Results similar as before: Minor changes in coefficient values
Liberalism and Home Equity Bias

21. Dataset variations: OECD countries (add gov.expenditures)
“GovEx” Summary statistics (numbers in %)
Estimation results (20 countries)
Liberalism and Home Equity Bias

22. Liberalism and Home Equity Bias
THANK YOU
Liberalism and Home Equity Bias