Home Bias in Financial Markets: Robust Satisficing with Info Gaps

FRB of Atlanta Working Paper No. 2003-35

22 Pages Posted: 19 Jan 2004

See all articles by Yakov Ben-Haim

Yakov Ben-Haim

Technion-Israel Institute of Technology - Faculty of Mechanical Engineering

Karsten Jeske

Mellon Capital Management - Research

Date Written: December 2003

Abstract

The observed patterns of equity portfolio allocation around the world are at odds with predictions from a capital asset pricing model (CAPM). What has come to be called the "home-bias" phenomenon is that investors tend to hold a disproportionately large share of their equity portfolio in home country stocks as compared with predictions of the CAPM. This paper provides an explanation of the home-bias phenomenon based on information-gap decision theory. The decision concept that is used here is that profit is satisficed and robustness to uncertainty is maximized rather than expected profit being maximized. Furthermore, uncertainty is modeled nonprobabilistically with info-gap models of uncertainty, which can be viewed as a possible quantification of Knightian uncertainty.

Keywords: Equity home bias, Knightian uncertainty

JEL Classification: D81, F30, G11, G15

Suggested Citation

Ben-Haim, Yakov and Jeske, Karsten, Home Bias in Financial Markets: Robust Satisficing with Info Gaps (December 2003). FRB of Atlanta Working Paper No. 2003-35. Available at SSRN: https://ssrn.com/abstract=487585 or http://dx.doi.org/10.2139/ssrn.487585

Yakov Ben-Haim

Technion-Israel Institute of Technology - Faculty of Mechanical Engineering ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

Karsten Jeske (Contact Author)

Mellon Capital Management - Research ( email )

595 Market Street
Suite 3000
San Francisco, CA 94105
United States
415-546-6056 (Phone)

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