Model Uncertainty, Financial Market Integration and the Home Bias Puzzle
Tilburg University - Department of Finance
Université de Toulouse, Toulouse Business School - Barcelona Campus (ESEC)
Jenke Ter Horst
Tilburg University - Center for Economic Research (CentER)
Journal of International Money and Finance, Vol. 26, No. 4, 2007
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, G15Accepted Paper Series
Date posted: June 26, 2007
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