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Can Domestic Liabilities Explain the Home Bias in UK Investment Portfolios?

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  • David Chaundy

Abstract

It has been suggested that domestic liabilities may be an important factor in explaining the existence of a home bias in international investment portfolios. This paper provides a theoretical justification for this claim in a mean-variance framework. However, an empirical analysis for the UK does not find this effect to be large. Mean-variance efficient portfolios already exhibit significant home bias relative to the world market portfolio. Further, the predicted portfolios differ considerably from the actual portfolios of UK life assurance companies and pension funds. Possible reasons for this include weaknesses in the mean-variance approach and the role of peer pressure.

Suggested Citation

  • David Chaundy, 1999. "Can Domestic Liabilities Explain the Home Bias in UK Investment Portfolios?," Working Papers wp116, Centre for Business Research, University of Cambridge.
    • Handle: RePEc:cbr:cbrwps:wp116
    Note: PRO-1
    as

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    File URL: https://www.jbs.cam.ac.uk/cbrwp116/
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    References listed on IDEAS

    as
    1. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
    2. Cooper, Ian & Kaplanis, Evi, 1994. "Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium," The Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 45-60.
    3. A. J. Frost & I. J. S. Henderson, 1983. "Implications of Modern Portfolio Theory for Life Assurance Companies," Palgrave Macmillan Books, in: Desmond Corner & David G. Mayes (ed.), Modern Portfolio Theory and Financial Institutions, chapter 8, pages 163-180, Palgrave Macmillan.
    4. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-675, September.
    5. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    6. Elton, Edwin J. & Gruber, Martin J., 1992. "Optimal investment strategies with investor liabilities," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 869-890, September.
    7. Chunhachinda, Pornchai & Dandapani, Krishnan & Hamid, Shahid & Prakash, Arun J., 1997. "Portfolio selection and skewness: Evidence from international stock markets," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 143-167, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    mean-variance; liabilities; portfolio allocation; pension funds; insurance companies.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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