Optimal International Asset Allocation and Home Bias
This paper examines the optimal allocation each period of an internationally diversified portfolio from the different points of view of a UK and a US investor. A multivariate GARCH model is used to estimate the conditional covariance matrix of returns, and to rebalance their portfolios each period according to CAPM. Domestic equity is the dominant asset in the optimal portfolio for both investors, but the US investor bears less risk than the UK investor, and holds less foreign equity - 20% compared to 25%. Survey evidence indicates actual shares are 6% and 18%, respectively, making the home-bias puzzle more acute for US than UK investors. Put another way, there seems to be more potential gains from increased international diversification for the US than the UK investor.
|Date of creation:||Dec 1998|
|Contact details of provider:|| Postal: Maynooth, Co. Kildare|
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting
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": A Risk Management Approach to Optimal Asset Allocation,"
Economics, Finance and Accounting Department Working Paper Series
n851298, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
- Thomas J. Flavin & Michael R. Wickens, 2001. "A Risk Management Approach to Optimal Asset Allocation," Economics, Finance and Accounting Department Working Paper Series n1080301, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
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