The Investment Home Bias with Peer Effect
35 Pages Posted: 3 Jun 2020
Date Written: May 6, 2020
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: Suggested Citation