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Author: Hisham S. Foad
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
This paper examines explanations for the equity home bias puzzle by utilizing the introduction of the euro in 1999 as a natural experiment. Equity home bias is the observation that although investors could attain both lower risk and greater returns by increasing international diversification in their equity portfolios, they fail to do so. Currency risk, informational asymmetries, transaction costs, and investor sentiment have all been presented as explanations for the bias with varying degrees of success. The introduction of the euro and the coordination of monetary policy across the Euro Area (EA) allows for a closer examination of these potential explanations. Optimal foreign equity shares are derived from a version of the CAP-M and then empirically tested using detailed data from the IMF's Coordinated Portfolio Investment Survey covering the foreign equity holdings of 23 countries for the years 1997 and 2001-2004. The key results of this analysis are that while equity home bias has fallen worldwide over this period, by far the sharpest drop has been for intra-EA equity holdings with home bias falling from 68% to 29% between the pre and post-euro periods. Several explanations for this drop are tested, with the reduction in information asymmetries emerging as the most promising candidate.
Author: Hisham S. Foad
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
This paper examines explanations for the equity home bias puzzle by utilizing the introduction of the euro in 1999 as a natural experiment. Equity home bias is the observation that although investors could attain both lower risk and greater returns by increasing international diversification in their equity portfolios, they fail to do so. Currency risk, informational asymmetries, transaction costs, and investor sentiment have all been presented as explanations for the bias with varying degrees of success. The introduction of the euro and the coordination of monetary policy across the Euro Area (EA) allows for a closer examination of these potential explanations. Optimal foreign equity shares are derived from a version of the CAP-M and then empirically tested using detailed data from the IMF's Coordinated Portfolio Investment Survey covering the foreign equity holdings of 23 countries for the years 1997 and 2001-2004. The key results of this analysis are that while equity home bias has fallen worldwide over this period, by far the sharpest drop has been for intra-EA equity holdings with home bias falling from 68% to 29% between the pre and post-euro periods. Several explanations for this drop are tested, with the reduction in information asymmetries emerging as the most promising candidate.
Author: Moritz Maier
Publisher:
ISBN:
Category :
Languages : en
Pages : 1
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Book Description
This paper introduces a return-based approach to studying a possible home bias of equity funds by estimating their exposures in their home countries. We first confirm the robustness of our approach using simulated portfolios with different proportions of domestic and foreign stocks. The empirical analysis examines equity funds domiciled in fifteen European countries that invest in European stocks. We examine individual funds as well as portfolios comprising funds that are all domiciled in a particular country. Our findings reveal that the portfolios of four domiciles show a significant home bias. Moreover, we observe that in seven domiciles more than one quarter of the individual funds are home-biased. These results are robust when controlling for fund-specific benchmarks or for the average country exposures of all funds in our final sample. Finally, a home bias of individual funds is not related to superior performance, but actually results in higher investment risk consistent with underdiversification.
Author: Reena Aggarwal
Publisher: World Bank Publications
ISBN:
Category : Foreign exchange
Languages : en
Pages : 47
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Book Description
Author: Kavous Ardalan
Publisher: Routledge
ISBN: 1000001431
Category : Business & Economics
Languages : en
Pages : 230
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Book Description
This book provides a comprehensive and critical analysis of research outcomes on the equity home bias puzzle – that people overinvest in domestic stocks relative to the theoretically optimal investment portfolio. It introduces place attachment – the bonding that occurs between individuals and their meaningful environments – as a new explanation for equity home bias, and presents a philosophically multi-paradigmatic view of place attachment. For the first time, a comprehensive and up-to-date review of the extant literature is provided, demonstrating that place attachment is a contributing factor to 22 different topics in which variations of home bias are present. The author also analyses the social-psychological underpinnings of place attachment, and considers the effect of multi-culturalism on the future of equity home bias. The book’s unique approach discusses the issues in conceptual terms rather than through data and statistical methods. This multi- and inter-disciplinary book is an invaluable resource for graduate students and researchers interested in economics, finance, philosophy, and/or methodology, introducing them to a new line of research.
Author: Ian Cooper
Publisher:
ISBN: 9781601987631
Category : International finance
Languages : en
Pages : 133
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Book Description
Home bias - the empirical phenomenon that investors assign anomalously high weights to their own domestic assets - has puzzled academics for decades: financial theory predicts that an internationally well diversified portfolio of stocks and short-term bonds can reduce risk significantly without affecting expected return. Although the globalization of international equity markets has increased international investments, equity portfolios remain severely home biased today, and no single explanation seems to solve the puzzle completely. In this paper, we first provide a thorough description of the equity home bias phenomenon by defining, discussing, and applying the competing measures and presenting some estimates of the costs of under-diversification. Second, we evaluate the explanations for the equity home bias proposed in the literature such as information asymmetries, behavioral aspects, barriers to foreign investment, and governance issues, and conclude that each explanation on its own falls short, suggesting that the equity home bias probably reflects a combination of factors. Lastly, we review the implications of international under-diversification for portfolio formation and the cost of capital of companies.
Author: Moritz Maier
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Book Description
This paper analyzes determinants of home bias in equity funds based on monthly holdings data using panel and quantile regressions. We investigate 699 equity funds, domiciled in fifteen European countries, that broadly invested in European stocks from January 2003 to December 2016. More than ninety percent of our sample funds show, on average, a home bias. In addition, the home bias across funds is quite stable over time. Analyzing the determinants of this home bias, our empirical results from panel regressions indicate that macroeconomic development, stock market development and fund-specific characteristics have, on average, a significant influence on the home bias of individual funds. Applying quantile regressions, we find the effects of several determinants, such as real growth in the gross domestic product, past excess return of the domestic stock market or number of stocks held by funds to be clearly related to the funds' level of home bias. Further analyses of subportfolios of funds show that informational advantages do not seem to be a reason for the observed home bias.
Author: David R. Kotok
Publisher: John Wiley & Sons
ISBN: 0470617586
Category : Business & Economics
Languages : en
Pages : 210
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Book Description
An insider's guide to investing in Europe With the U.S. market in shambles, investors are looking for other places to put their money. Europe has become the destination of choice, and will continue to be for the foreseeable future. Using the different perspectives of an author who lives in Europe and an author who lives in the United States, Invest in Europe Now! is one the most informative guides to making money outside North America. It outlines the best ways to take advantage of the rapidly shifting global financial environment and shows you what indicators to follow, what instruments and markets are best poised for growth, and how to avoid various pitfalls along the way. Outlines the safest ways to invest in Europe and secure the returns you desire Written by a unique author team, which represent both the U.S. and European perspective Discusses how some European markets and stocks are relatively more attractive than their American counterparts Throughout this book, David Kotok and Vincenzo Sciaretta reveal the realities of investing in Europe and how you can benefit from doing so.
Author: Hossein Asgharian
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
The home bias is defined as the tendency of the investors to invest a larger proportion of their wealth in domestic equities than what would be optimal based on the meanvariance principle. There are several explanations for this observed home bias, e.g., barriers to foreign investments and information asymmetry. From a Bayesian viewpoint the level of the investors' prior mistrust in a certain asset-pricing model may explain the home bias, despite the fact that statistical tests fail in rejecting the model. The purpose is to analyze how fragile the investors' prior confidence in ICAPM (International Capital Asset Pricing Model) must be to cause home bias in European equity markets. We use a Bayesian approach to estimate the predictive distribution of the asset returns for each European country under different prior scenarios. The investors' optimal portfolio weights are constructed from the moments of this predictive distribution. The result shows that there is a strong home bias in most countries, which cannot be explained by any degree of disbelief in the ICAPM. The losses due to the holdings of inefficient portfolios by pension funds are assessed via certainty equivalent calculations. Italian pension funds suffer more than the funds of the other countries from the home bias while UK and the Netherlands experience very small losses.
Author: Adam Hantak
Publisher: diplom.de
ISBN: 3842821530
Category : Business & Economics
Languages : en
Pages : 76
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Book Description
Inhaltsangabe:Introduction: Every investor faces the challenge of making the right investment decisions. Upon analysing the allocation of wealth among countries, it becomes evident that investors do not invest their financial wealth internationally, but tend to invest the majority of their wealth in domestic equity. Financial theory deems this behaviour irrational, since holding a domestic portfolio is considered to be suboptimal due to the foregone benefits of international diversification. Assuming that the financial theory is right in this prediction, the question as to what are the causes for this irrational behaviour comes to mind and forms the focal point of this work. One the one hand, investors may be well aware of the costs connected with holding a domestic portfolio. Market restrictions, however, do not allow investors to attain the optimal international portfolio. On the other hand, investors may be unaware of the benefits of international diversification, and instead have a preference for domestic equity and fail to perceive the domestic portfolio as suboptimal. The traditional financial theory for this behaviour provides the institutional explanations with the focus on market imperfections and the behavioural financial theory provides explanations with the focus on investor irrationality. Following this classification of both theories, this work briefly reviews institutional explanations, as many of them lack empirical evidence and concentrates mainly on the behavioural explanations, as they are the focal point of current research and find wide empirical support. After defining equity home bias and related concepts in Chapter 2, the costs of equity home bias are discussed in Chapter 3. In Chapter 4, institutional explanations are considered. Section 4.1 reviews briefly a number of older institutional explanations, such as direct investment barriers, transactions costs and taxes, as they do not find much empirical support. Section 4.2 explores in more detail an explanation based on information asymmetry, as it may at least partially contribute to the solution of the home bias problem. With the emergence and acceptance of behavioural finance new explanations based on irrationality of investors were advanced and are presented in Chapter 5. Section 5.1 explores optimistic expectations about domestic markets as one of the early behavioural explanations. Section 5.2 deals with the competence hypothesis and creates a foundation for the [...]
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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