Home bias and expected returns: A structural approach

Martin Wallmeier and Christoph Iseli

Journal of International Money and Finance, 2022, vol. 124, issue C

Abstract: We study the effect of the home bias on international asset pricing by extending the core-satellite approach of active asset allocation to an equilibrium analysis. In this framework, investors combine a common core portfolio with an active investment in their home asset. In equilibrium, the core portfolio will deviate from the global market portfolio in characteristic ways, which we exploit to propose a new test of the home premium in expected returns. Unlike previous findings, our evidence suggests that the premium is almost negligible even though the home bias is substantial. This result is mainly driven by the generally high correlation of index returns and the distribution of the relative level of the home bias across countries.

Keywords: Home bias; Asset pricing; International diversification; Implied expected return; Core-satellite approach; Home preferences; Equilibrium model (search for similar items in EconPapers)
JEL-codes: F30 G02 G11 G12 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:124:y:2022:i:c:s0261560622000377

DOI: 10.1016/j.jimonfin.2022.102634

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