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Model Uncertainty, Financial Market Integration and the Home Bias PuzzleLieven BaeleTilburg University - Department of Finance Crina PungulescuUniversité de Toulouse, Toulouse Business School - Barcelona Campus (ESEC) Jenke Ter HorstTilburg University - Center for Economic Research (CentER) 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.
Number of Pages in PDF File: 39 Keywords: Home Bias, Market Integration, Euro, Model Uncertainty JEL Classification: F36, G11, G15 working papers seriesDate posted: July 31, 2006 ; Last revised: January 28, 2008Suggested CitationContact Information
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