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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.

Suggested Citation

  • Campbell, Rachel A. & Kräussl, Roman, 2006. "Revisiting the home bias puzzle: Downside equity risk," CFS Working Paper Series 2006/31, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:200631
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    Cited by:

    1. Mishra, Anil V., 2016. "Foreign bias in Australian-domiciled mutual fund holdings," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 101-123.
    2. Anil V. Mishra, 2017. "Foreign bias in Australia's international equity holdings," Review of Financial Economics, John Wiley & Sons, vol. 33(1), pages 41-54, April.
    3. Abreu, Margarida & Mendes, Victor & Santos, João A.C., 2011. "Home country bias: Does domestic experience help investors enter foreign markets?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2330-2340, September.
    4. Ding Du & Alan May, 2006. "CAPM and Home Bias; SD Prospective Plantings Analysis," Issue Briefs 2006473, South Dakota State University, Department of Economics.
    5. 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.
    6. 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.
    7. Marc S. Paolella, 2017. "The Univariate Collapsing Method for Portfolio Optimization," Econometrics, MDPI, vol. 5(2), pages 1-33, May.
    8. Anil Mishra, 2011. "Australia’s equity home bias and real exchange rate volatility," Review of Quantitative Finance and Accounting, Springer, vol. 37(2), pages 223-244, August.
    9. Liu, Elaine M. & Huang, JiKun, 2013. "Risk preferences and pesticide use by cotton farmers in China," Journal of Development Economics, Elsevier, vol. 103(C), pages 202-215.
    10. Hyung, Namwon & de Vries, Casper G., 2012. "Simulating and calibrating diversification against black swans," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1162-1175.
    11. Garg, Jyoti & Karmakar, Madhusudan & Paul, Samit, 2023. "A study on equity home bias using vine copula approach," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    12. Stéphanie Prat & Sophie Brana, 2010. "The Introduction of Emerging Currencies into a Portfolio: Towards a more Complete Diversification Model," International Economics, CEPII research center, issue 121, pages 5-24.
    13. Diyarbakirlioglu, Erkin, 2011. "Foreign equity flows and the “Size Bias”: Evidence from an emerging stock market," Emerging Markets Review, Elsevier, vol. 12(4), pages 485-509.
    14. Diyarbakirlioglu, Erkin, 2011. "Domestic and foreign country bias in international equity portfolios," Journal of Multinational Financial Management, Elsevier, vol. 21(5), pages 301-329.
    15. Mishra, Anil V., 2015. "Measures of equity home bias puzzle," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 293-312.
    16. Erkin Diyarbakirlioglu, 2011. "Foreign equity flows and the "Size Bias" : Evidence from an emerging stock market," Post-Print hal-01127657, HAL.

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    More about this item

    Keywords

    Asset Pricing; Home Bias; Downside Risk; Prospect Theory;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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