This paper investigates to what extent ongoing integration has eroded the equity home bias. To measure home bias, we compare observed foreign asset holdings of a set of 25 developed markets with optimal weights obtained from 5 benchmark models. Under the assumptions of the classical model in home bias studies, the International CAPM (I-CAPM), optimal portfolio weights are given by the relative world market capitalization shares. Four alternative models that allow for various degrees of mistrust in the I-CAPM and involve returns data in computing optimal portfolio weights, generally indicate a substantially lower yet still positive home bias. We observe a reduction in the home bias for many countries at the end of the 1990s and link the sharp decrease in the equity home bias to time-varying globalization and regional integration.JEL classification: F36, G11, G15
This paper investigates to what extent ongoing integration has eroded the equity home bias. To measure home bias, we compare observed foreign asset holdings of a set of 25 developed markets with optimal weights obtained from 5 benchmark models. Under the assumptions of the classical model in home bias studies, the International CAPM (I-CAPM), optimal portfolio weights are given by the relative world market capitalization shares. Four alternative models that allow for various degrees of mistrust in the I-CAPM and involve returns data in computing optimal portfolio weights, generally indicate a substantially lower yet still positive home bias. We observe a reduction in the home bias for many countries at the end of the 1990s and link the sharp decrease in the equity home bias to time-varying globalization and regional integration.JEL classification: F36, G11, G15
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