Are Investors Home Biased? Evidence from Germany

In most if not all countries the proportion of portfolio assets that investors allocate to foreign securities is clearly less than mean-variance analysis predicts. In Germany, for example, mutual funds hold only 66 percent of their investments in non-German securities while the latter represent almost 85 percent of the worldwide market value for bonds and 95 percent for equities. Even greater discrepancies exist for other financial intermediaries such as insurance companies or pension funds. Finally, the poorest portfolio diversification is exhibited by private German investors whose direct investments abroad only amount to 37 percent and 19 percent of their stock and bond holdings, respectively (for the year 2001: see Deutsche Bundesbank, 2001, 2004c).