Myopic Loss Aversion, Asymmetric Correlations, and the Home Bias

Carlos Carvalho () and Kevin Amonlirdviman

No 61, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: Myopic loss aversion has been used to explain why a high equity premium might be consistent with plausible levels of risk aversion. The intuition is that it plays the role of high risk aversion in portfolio choice. But if so, should these agents not perceive larger gains from international diversification than standard preference agents with realistic levels of risk aversion? They might not because stock market returns are asymmetrically correlated. We analyze the portfolio problem of a myopic loss averse investor who has to choose between home and foreign equities in the presence of asymmetrically correlated returns. Perhaps surprisingly, depending on the horizon, this investor behaves similarly to one with standard preferences in the context of the home bias puzzle

Keywords: myopic loss aversion; home bias; asymmetric correlations; equity premium puzzle (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2004-08-11
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