Home Bias and Expected Returns: A Structural Approach

43 Pages Posted: 25 Feb 2021 Last revised: 21 Jun 2022

See all articles by Martin Wallmeier

Martin Wallmeier

University of Fribourg - Faculty of Economics and Social Science

Christoph Iseli

affiliation not provided to SSRN

Date Written: February 23, 2021

Abstract

We study the effect of the home bias on international asset pricing by extending the core-satellite approach of active asset allocation to an equilibrium analysis. In this framework, investors combine a common core portfolio with an active investment in their home asset. In equilibrium, the core portfolio will deviate from the global market portfolio in characteristic ways, which we exploit to propose a new test of the home premium in expected returns. Unlike previous findings, our evidence suggests that the premium is almost negligible even though the home bias is substantial. This result is mainly driven by the generally high correlation of index returns and the distribution of the relative level of the home bias across countries.

Keywords: Home bias, Asset pricing, International diversification, Implied expected return, Core-satellite approach, Home preferences, Equilibrium model

JEL Classification: G11, G12, G15, G02, F30

Suggested Citation

Wallmeier, Martin and Iseli, Christoph, Home Bias and Expected Returns: A Structural Approach (February 23, 2021). Journal of International Money and Finance, Vol. 124, No. 102634, 2022, Available at SSRN: https://ssrn.com/abstract=3791272 or http://dx.doi.org/10.2139/ssrn.3791272

Martin Wallmeier (Contact Author)

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland
+41 26 300 8294 (Phone)

Christoph Iseli

affiliation not provided to SSRN

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