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Revisiting the home bias puzzle: Downside equity risk

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  • Campbell, Rachel A.
  • Kräussl, Roman

Abstract

Deviations from normality in financial return series have led to the development of alternative portfolio selection models. One such model is the downside risk model, whereby the investor maximizes his return given a downside risk constraint. In this paper we empirically observe the international equity allocation for the downside risk investor using 9 international markets’ returns over the last 34 years. The results are stable for various robustness checks. Investors may think globally, but instead act locally, due to greater downside risk. The results provide an alternative view of the home bias phenomenon, documented in international financial markets. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2006/31.

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Date of creation: 2006
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Handle: RePEc:zbw:cfswop:200631

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Keywords: Asset Pricing; Home Bias; Downside Risk; Prospect Theory;

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References

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Cited by:
  1. Diyarbakirlioglu, Erkin, 2011. "Foreign equity flows and the “Size Bias”: Evidence from an emerging stock market," Emerging Markets Review, Elsevier, Elsevier, vol. 12(4), pages 485-509.
  2. Elaine Liu & JiKun Huang, 2013. "Risk Preferences and Pesticide Use by Cotton Farmers in China," Working Papers, Department of Economics, University of Houston 201310920, Department of Economics, University of Houston.
  3. Margarida Abreu & Victor Mendes & João A. Santos, 2010. "Home Country Bias: Does Domestic Experience Help Investors Enter Foreign Markets?," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2010/02, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. Sophie Brana & Stéphanie Prat, 2009. "The Introduction Of Emerging Currencies Into A Portfolio: Towards A More Complete Diversification Model," Working Papers hal-00616581, HAL.
  5. Gary Burtless, 2007. "International Investment for Retirement Savers: Historical Evidence on Risk and Returns," Working Papers, Center for Retirement Research at Boston College wp2007-05, Center for Retirement Research, revised Feb 2007.
  6. Ding Du & Alan May, 2006. "CAPM and Home Bias; SD Prospective Plantings Analysis," Issue Briefs 2006473, South Dakota State University, Department of Economics.
  7. Hyung, Namwon & de Vries, Casper G., 2012. "Simulating and calibrating diversification against black swans," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(8), pages 1162-1175.
  8. Diyarbakirlioglu, Erkin, 2011. "Domestic and foreign country bias in international equity portfolios," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 21(5), pages 301-329.
  9. Mishra, Anil, 2013. "Measures of Equity Home Bias Puzzle," MPRA Paper 51223, University Library of Munich, Germany.
  10. Anil Mishra, 2011. "Australia’s equity home bias and real exchange rate volatility," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 37(2), pages 223-244, August.
  11. Gary Burtless, 2006. "Risk and Reward of International Investing for U.S. Retirement Savers: Historical Evidence," Working Papers, Center for Retirement Research at Boston College wp2006-25, Center for Retirement Research, revised Dec 2006.

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