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Open AccessArticle

The Investment Home Bias with Peer Effect

Department of Finance, Hebrew University, Jerusalem 9190401, Israel
J. Risk Financial Manag. 2020, 13(5), 94; https://doi.org/10.3390/jrfm13050094
Received: 26 February 2020 / Revised: 7 May 2020 / Accepted: 7 May 2020 / Published: 11 May 2020
(This article belongs to the Special Issue Mathematical Finance with Applications)
Observed international diversification implies an investment home bias (IHB). Can bivariate preferences with a local domestic peer group rationalize the IHB? For example, it is argued that wishing to have a large correlation with the Standard and Poor’s 500 stock index (S&P 500 stock index) may induce an increase in the domestic investment weight by American investors and, hence, rationalize the IHB. While this argument is valid in the mean-variance framework, employing bivariate first-degree stochastic dominance (BFSD), we prove that this intuition is generally invalid. Counter intuitively, employing “keeping up with the Joneses” (KUJ) preference with actual international data even enhances the IHB phenomenon. View Full-Text
Keywords: investment home bias (IHB); bivariate first-degree stochastic dominance (BFSD); keeping up with the Joneses (KUJ); correlation loving (CL) investment home bias (IHB); bivariate first-degree stochastic dominance (BFSD); keeping up with the Joneses (KUJ); correlation loving (CL)
MDPI and ACS Style

Levy, H. The Investment Home Bias with Peer Effect. J. Risk Financial Manag. 2020, 13, 94.

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