The Cost of Home Bias in Emerging Markets: Evidence from the Russia-Ukraine Conflict

The Russia-Ukraine war remains ongoing, causing profound economic repercussions for Russian investors. Beginning in October 2021, as geopolitical tensions escalated and the prospect of conflict became imminent, the Russian stock market entered a period of sharp decline. Despite a global trend of declining home bias over recent decades, Russian equity investors continue to display an exceptionally strong preference for domestic holdings. This persistent home bias places Russia among the countries with the highest levels of domestic investment concentration, increasing investors’ exposure to country-specific risks, particularly during crises. This paper provides novel empirical evidence on the financial cost of home bias under an active conflict, a dimension largely overlooked in prior literature. By focusing on this unique geopolitical crisis, the study offers valuable insights into how such events influence investor behavior and amplify the economic impact of home bias under conditions of heightened uncertainty. Home bias is generally more pronounced in emerging markets than in developed economies, increasing investors’ vulnerability to geopolitical and economic shocks due to higher market volatility and structural inefficiencies. The findings of this study deliver a cautionary message for investors, both private and institutional, about the risks associated with under-diversified portfolios, especially during periods of instability.