Home bias among European investors from a Bayesian perspective

This paper determines to what extent the estimated expect returns on European equity indices will be affected by different degrees of prior confidence in the ICAPM. We also measure how fragile the investors’ prior confidence in ICAPM should be in order to explain the home bias of European pension fu...

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Bibliographic Details
Published in:Journal of international financial markets, institutions & money institutions & money, 2006-12, Vol.16 (5), p.397-410
Main Authors: Asgharian, Hossein, Hansson, Björn
Format: Article
Language:English
Subjects:
Asset valuation
Bayesian approach
Bayesian method
Bias
Capital Asset Pricing Model
Europe
Home bias
ICAPM
International capital market
International finance
Investment analysis
Investors
Portfolio selection
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Summary:This paper determines to what extent the estimated expect returns on European equity indices will be affected by different degrees of prior confidence in the ICAPM. We also measure how fragile the investors’ prior confidence in ICAPM should be in order to explain the home bias of European pension funds. A Bayesian approach is used to estimate the expected asset returns under different prior scenarios. We show that a moderate mistrust in ICAPM results in estimates of the expected returns, which substantially deviate from the estimates by ICAPM. Furthermore, we find a strong home bias in most countries, which cannot be explained by any degree of disbelief in the ICAPM.
ISSN:1042-4431
1873-0612
DOI:10.1016/j.intfin.2005.05.003