The Investment Home Bias with Peer Effect

Haim Levy
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Haim Levy: Department of Finance, Hebrew University, Jerusalem 9190401, Israel

JRFM, 2020, vol. 13, issue 5, 1-19

Abstract: Observed international diversification implies an investment home bias (IHB). Can bivariate preferences with a local domestic peer group rationalize the IHB? For example, it is argued that wishing to have a large correlation with the Standard and Poor’s 500 stock index (S&P 500 stock index) may induce an increase in the domestic investment weight by American investors and, hence, rationalize the IHB. While this argument is valid in the mean-variance framework, employing bivariate first-degree stochastic dominance (BFSD), we prove that this intuition is generally invalid. Counter intuitively, employing “keeping up with the Joneses” (KUJ) preference with actual international data even enhances the IHB phenomenon.

Keywords: investment home bias (IHB); bivariate first-degree stochastic dominance (BFSD); keeping up with the Joneses (KUJ); correlation loving (CL) (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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