Model Uncertainty, Financial Market Integration and the Home Bias Puzzle
39 Pages Posted: 31 Jul 2006 Last revised: 28 Jan 2008
Date Written: January 22, 2008
Abstract
This paper investigates to what extent ongoing integration has eroded the equity home bias. To measure home bias, we compare observed foreign asset holdings of 25 markets with optimal portfolio weights obtained from 5 benchmark models. The International CAPM optimal weights equal the relative world market capitalization shares. Alternative models that allow for various degrees of mistrust in the I-CAPM and involve returns data in computing optimal weights indicate a substantially lower yet positive home bias. For many countries, home bias decreases sharply at the end of the 1990s, a development which we link to time-varying globalization and regional integration.
Keywords: Home Bias, Market Integration, Euro, Model Uncertainty
JEL Classification: F36, G11, G15
Suggested Citation: Suggested Citation
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