Bayesian Asset Allocation and U.S. Domestic Bias

U.S. investors hold much less international stock than is optimal according to mean–variance portfolio theory applied to historical data. We investigated whether this home bias can be explained by Bayesian approaches to 
U.S. investors hold much less international stock than is optimal according to mean–variance portfolio theory applied to historical data. We investigated whether this home bias can be explained by Bayesian approaches to international asset allocation. In comparison with mean–variance analysis, Bayesian approaches use different techniques for obtaining the set of expected returns by shrinking the sample means toward a reference point that is inferred from economic theory. Applying the Bayesian approaches to the field of international diversification, we found that a substantial home bias can be explained when a U.S. investor has a strong belief in the global mean–variance efficiency of the U.S. market portfolio, and in this article, we show how to quantify the strength of this belief. We also found that one of the Bayesian approaches leads to the same implications for asset allocation as the mean–variance/tracking-error criterion. In both cases, the optimal portfolio is a combination of the U.S. market portfolio and the mean–variance-efficient portfolio with the highest Sharpe ratio.
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Metadaten
Author:Ulf Herold, Raimond Maurer
URN:urn:nbn:de:hebis:30-17977
Parent Title (English):Universität Frankfurt am Main. Fachbereich Wirtschaftswissenschaften: [Working paper series / Finance and accounting] Working paper series, Finance & Accounting ; No. 92
Series (Serial Number):Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting (092)
Publisher:Univ., Fachbereich Wirtschaftswiss.
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2003
Year of first Publication:2003
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/10/07
Note:
Onlinezugriff s.a. http://www.jstor.org/stable/4480528
Source:Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting ; 92, Financial Analysts Journal, Vol. 59, No. 6, pp. 54-65, November/December 2003
HeBIS PPN:425454290
Institutes:Wirtschaftswissenschaften
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoArchivex. zur Lesesaalplatznutzung § 52b UrhG

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