The Investment Home Bias with Peer Effect

35 Pages Posted: 3 Jun 2020

See all articles by Haim Levy

Haim Levy

Hebrew University of Jerusalem

Date Written: May 6, 2020

Abstract

Observed international diversification implies an investment home bias (IHB). Can bivariate preferences with a local domestic peer group rationalize the IHB? For example, it is argued that wishing to have a large correlation with the S&P 500 stock index may induce an increase in the domestic investment weight by American investors and, hence, rationalizes the IHB. While this argument is valid in the mean-variance framework, employing Bivariate First-degree Stochastic Dominance (BFSD), we prove that this intuition is generally invalid. Counter intuitively, employing “Keeping Up with the Joneses” (KUJ) preference with actual international data even enhances the IHB phenomenon.

Keywords: Investment Home Bias (IHB), Bivariate First-Degree Stochastic Dominance (BFSD), Keeping Up with the Joneses (KUJ), Correlation Loving (CL)

JEL Classification: D81, C91

Suggested Citation

Levy, Haim, The Investment Home Bias with Peer Effect (May 6, 2020). Available at SSRN: https://ssrn.com/abstract=3594511 or http://dx.doi.org/10.2139/ssrn.3594511

Haim Levy (Contact Author)

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, Jerusalem 91905
Israel

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