European Union pension funds and the home bias. Geographical asset allocation in light of three goals set by the European Commission
This thesis examines whether European Union pension funds overweigh domestic assets in their portfolio and aims to determine why they have a so called home bias. Up to 79% of the 110 respondents of a secondary survey are shown to be biased towards domestic and European assets when compared to the capital asset pricing model. Part of the home bias can be explained by real exchange rate risks, asymmetric information and behavioural factors. Further explanations, such as indirect diversification benefits, human capital correlation, stock market development, funds characteristics and regulation on foreign asset holdings are discussed, estimated and tested. In conclusion this paper finds that real exchange rate volatility and bond holdings have a significantly positive relationship with pension fund home biases. Funds who allocate more of their portfolio to bonds also have a higher home bias for their equity portfolios. The percentage of externally managed portfolio shows a negative relationship with fund home biases. There is no significant effect for different fund sizes, types and regulations. Surprisingly, funds that are located in countries with higher human capital correlations show higher home biases, especially for equities.