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Optimal International Asset Allocation and Home Bias

Author

Listed:
  • Thomas J. Flavin

    (Economics, National University of Ireland, Maynooth)

  • Michael R. Wickens

    (University of York, UK.)

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.

Suggested Citation

  • Thomas J. Flavin & Michael R. Wickens, 1998. "Optimal International Asset Allocation and Home Bias," Economics Department Working Paper Series n841298, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n841298
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    References listed on IDEAS

    as
    1. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    2. Andrew Clare & Raymond O'Brien & Stephen Thomas & Michael Wickens, "undated". "Macroeconomic Shocks and the Domestic CAPM: Evidence from the UK Stock Market," Discussion Papers 94/10, Department of Economics, University of York.
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    5. Thomas J. Flavin & Michael R. Wickens, 1998. ": A Risk Management Approach to Optimal Asset Allocation," Economics Department Working Paper Series n851298, Department of Economics, National University of Ireland - Maynooth.
    6. Cumby, Robert & Figlewski, Stephen & Hasbrouck, Joel, 1994. "International asset allocation with time varying risk: an analysis and implementation," Japan and the World Economy, Elsevier, vol. 6(1), pages 1-25.
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    12. Thomas J. Flavin & Michael R. Wickens, 2000. "Global Asset Allocation with Time-varying Risk," Economics Department Working Paper Series n1020800, Department of Economics, National University of Ireland - Maynooth.
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    14. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-278, July.
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    Cited by:

    1. Thomas J. Flavin & Michael R. Wickens, 2000. "Global Asset Allocation with Time-varying Risk," Economics Department Working Paper Series n1020800, Department of Economics, National University of Ireland - Maynooth.

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    More about this item

    Keywords

    Asset allocation; home bias; GARCH;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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