A study on equity home bias using vine copula approach

Jyoti Garg, Madhusudan Karmakar and Samit Paul

The North American Journal of Economics and Finance, 2023, vol. 64, issue C

Abstract: The study investigates if the mean-downside risk optimization technique for asset allocation can shed new light on the equity home bias puzzle. We propose a combined EGARCH-EVT-C-vine copula approach to properly capture the stylized properties of asset return series and estimate the downside risk appropriately by CVaR. Using weekly stock price data from 12 countries including seven G7 countries and five BRICS countries, we estimate international portfolio allocations based on mean-CVaR optimization model and compare the results to the mean–variance allocations. The study has been done from the perspective of US investors. The results of the study suggest that the US equity home bias is overestimated by the mean–variance approach. The mean-CVaR model helps to factor in the additional risk that investors face in international portfolio diversification and provides a plausible empirical explanation for the equity home bias phenomenon. The findings of the study have direct implications for portfolio managers and investors for taking better international investment decisions based on the knowledge of optimum portfolio.

Keywords: CVaR; Home bias; Vine copula; Downside risk; Portfolio optimization (search for similar items in EconPapers)
JEL-codes: G10 G11 G15 G17 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:64:y:2023:i:c:s1062940822001954

DOI: 10.1016/j.najef.2022.101860

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