Home bias during local exogenous crisis: Evidence from covid-19
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School of Business |
Master's thesis
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Authors
Date
2022
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
49+3
Series
Abstract
The benefits and importance of diversifying investments are key takeaways from financial courses taught all around the world. Furthermore, multiple financial studies, investor guides and even entire books have addressed the importance of the very same principle for decades. Although the benefits of diversification have been widely addressed, it has still been examined and recorded persistently that investors of all types tend to tilt their investment allocations towards home. In the existing financial literature, the following phenomenon is widely addressed as home bias. In this thesis, I study the presence of home bias and abnormal trading of locally identified stocks during the exogenous local crisis caused by COVID-19. This study aims to clarify and give a further idea of whether investors also visualize the following tendency towards home bias during the local exogenous crisis caused by COVID-19, a globally spread infectious disease which also embodies the characteristics of local exogenous crisis. I record that while COVID-19 infections increase in FIPS area in the United States, it causes increased abnormal trading in locally identified stocks. My results are aligned with the existing literature and suggest supportive evidence towards arguments that especially smaller stocks are favoured by local investors and home bias may exist even among professional investors. My results stay robust even after controlling the clustering of robust standard errors, introducing alternative measures for COVID-19 in the area and introducing firm fixed effects. Despite the following, I also suggest alternative reasons apart from home bias for the recorded behaviour during COVID-19 but leave it to the reader and future academics to debate over the most convincing explanations for the phenomenon. With this study, I aim to encourage future academics to consider more local perspectives while investigating effects in trading recognised by existing literature and to consider indirect effects while magnifying the total economic impact COVID-19 has posed on the world during the past years.Description
Thesis advisor
Nyberg, PeterKeywords
home bias, covid-19, exogenous crisis, abnormal trading, infectious disease