A Global Equilibrium Asset Pricing Model with Home Preference

Bruno Solnik () and Luo Zuo ()
Additional contact information
Bruno Solnik: Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong; and HEC Paris, 78350 Jouy en Josas, France
Luo Zuo: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142

Management Science, 2012, vol. 58, issue 2, 273-292

Abstract: We develop a global equilibrium asset pricing model assuming that investors suffer from foreign aversion, a preference for home assets based on familiarity. Using a utility formulation inspired by regret theory, we derive closed-form solutions. When the degree of foreign aversion is high in a given country, investors place a high valuation on domestic equity, which results in a low expected return. Thus, the model generates the simple prediction that a country's degree of home bias and the expected return of its domestic assets should be inversely related. Our predicted relation between the degree of home bias and a country's expected return has the opposite sign predicted by models that assume some form of market segmentation. Using International Monetary Fund portfolio data, we find that expected returns are negatively related to home bias. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.

Keywords: international asset pricing; home bias; familiarity; regret (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1110.1361 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:58:y:2012:i:2:p:273-292

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().