Home bias in financial markets: robust satisficing with info gaps
The observed patterns of equity portfolio allocation around the world are at odds with predictions from a capital asset pricing model (CAPM). What has come to be called the “home-bias” phenomenon is that investors tend to hold a disproportionately large share of their equity portfolio in home country stocks as compared with predictions of the CAPM. This paper provides an explanation of the home-bias phenomenon based on information-gap decision theory. The decision concept that is used here is that profit is satisficed and robustness to uncertainty is maximized rather than expected profit being maximized. Furthermore, uncertainty is modeled nonprobabilistically with info-gap models of uncertainty, which can be viewed as a possible quantification of Knightian uncertainty.
|Date of creation:||2003|
|Date of revision:|
|Contact details of provider:|| Postal: 1000 Peachtree St., N.E., Atlanta, Georgia 30309|
Web page: http://www.frbatlanta.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- French, Kenneth R & Poterba, James M, 1991.
"Investor Diversification and International Equity Markets,"
American Economic Review,
American Economic Association, vol. 81(2), pages 222-26, May.
- Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
- Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
- Itzhak Gilboa & David Schmeidler, 1989.
"Maxmin Expected Utility with Non-Unique Prior,"
- Karsten Jeske, 2001. "Equity home bias: Can information cost explain the puzzle?," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 31-42.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
When requesting a correction, please mention this item's handle: RePEc:fip:fedawp:2003-35. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Elaine Clokey)
If references are entirely missing, you can add them using this form.