Equity Home Bias in the Czech Republic
AbstractInvestors reveal a tendency to prefer domestic over foreign equities despite the financial losses. From institutional perspective the factors that cause home biasness are the barriers to entry the foreign markets, transaction costs, illiquidity, asymmetric information and information costs, corporate governance and inflation and exchange rate risks. Behavioral finance argues that irrationality of investors cause the home biasness. Investors tend to be under the influence of psychological biases: optimism, overconfidence, social identity, narrow framing and loss aversion. In this paper we introduce a model of optimal portfolio of Czech investors with three utility functions: Markowitz, exponential and CRRA. The prediction of the model without short selling suggests that Czech investors should have more than 60 % (between 72 - 83 % for feasible levels of risk aversion) in domestic equities. The OECD data claims that they hold around 87 % in domestic equities.
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Bibliographic InfoPaper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2010/07.
Length: 27 pages
Date of creation: Apr 2010
Date of revision: Apr 2010
Equity home bias; optimal investment portfolio; behavioral finance;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-02 (All new papers)
- NEP-IFN-2010-05-02 (International Finance)
- NEP-TRA-2010-05-02 (Transition Economics)
- NEP-UPT-2010-05-02 (Utility Models & Prospect Theory)
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