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Behavioral determinants of home bias - theory and experiment

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  • Dennis Dlugosch

    ()

  • Kristian Horn

    ()

  • Mei Wang

    ()

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    Abstract

    We study portfolio diversification in an experimental decision task, where asset returns depend on a draw from an ambiguous urn. Holding other information identical and controlling for the level of ambiguity, we find that labeling assets as being familiar or from the homeland of subjects increases portfolio weights by around 25%, respectively; although the return-generating process remains unaffected. Importantly, we only find these effects when the returns of assets are highly ambiguous. Our ambiguity robust mean-variance model accurately predicts benchmark portfolio weights of the experimental control group, where assets are not labeled: subjects allocate more wealth to assets with low ambiguity. For treatment group portfolios, which show a bias towards assets with a familiar or homeland label, the model does not hold. This misdiversification against the benchmark portfolio can be rationalized via the concept of source dependence of uncertainty attitudes.

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    File URL: http://eeecon.uibk.ac.at/wopec2/repec/inn/wpaper/2014-11.pdf
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    Bibliographic Info

    Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2014-11.

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    Length: 48 pages
    Date of creation: Apr 2014
    Date of revision:
    Handle: RePEc:inn:wpaper:2014-11

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    Keywords: Home bias; ambiguity aversion; familiarity; experiment;

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    1. Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Information Immobility and the Home Bias Puzzle," Journal of Finance, American Finance Association, vol. 64(3), pages 1187-1215, 06.
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    17. Fabio Maccheroni & Massimo Marinacci & Doriana Ruffino, 2010. "Alpha as Ambiguity: Robust Mean-Variance Portfolio Analysis," Working Papers 373, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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