Optimal International Asset Allocation and Home Bias

Thomas Flavin and Michael Wickens

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: This paper examines the optimal allocation each period of an internationally diversified portfolio from the different points of view of a UK and a US investor. A multivariate GARCH model is used to estimate the conditional covariance matrix of returns, and to rebalance their portfolios each period according to CAPM. Domestic equity is the dominant asset in the optimal portfolio for both investors, but the US investor bears less risk than the UK investor, and holds less foreign equity - 20% compared to 25%. Survey evidence indicates actual shares are 6% and 18%, respectively, making the home-bias puzzle more acute for US than UK investors. Put another way, there seems to be more potential gains from increased international diversification for the US than the UK investor.

Keywords: Asset allocation; home bias; GARCH (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Pages: 34 pages
Date: 1998-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:may:mayecw:n841298

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