Home Bias in International Stock Return Expectations

Despite the advantages of international portfolio diversification, actual equity portfolio holdings reveal a strong bias towards domestic stocks. One hypothesis is that this bias can be explained by stock return expectations expressed in probability judgments. To test that hypothesis and to analyze the underlying effects that might cause distortions in investors' expectations, we conducted a cross country study in Germany and the U.S. comparing participants' judgments about an identical set of German and U.S. stocks. Results show that both test groups feel more competent about domestic stocks. The asymmetric perception of competence is connected with an asymmetric assessment of probabilities. For both test groups subjective probability distributions of stock returns are significantly less dispersed and more optimistic for stocks associated with high competence levels than for stocks associated with low competence levels.

[1]  H. Raiffa,et al.  Judgment under uncertainty: A progress report on the training of probability assessors , 1982 .

[2]  E. Fama.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[3]  D. Glassman,et al.  Why empirical international portfolio models fail: evidence that model misspecification creates home asset bias , 1996 .

[4]  René M. Stulz,et al.  On the Effects of Barriers to International Investment , 1981 .

[5]  Dilek Önkal,et al.  Effects of feedback on probabilistic forecasts of stock prices , 1995 .

[6]  Janet A. Sniezek,et al.  Perceived Expertise and Its Effect on Confidence , 1994 .

[7]  G. Keren.  Calibration and probability judgements: Conceptual and methodological issues , 1991 .

[8]  K. French,et al.  Investor Diversification and International Equity Markets , 1991 .

[9]  Gur Huberman,et al.  Familiarity Breeds Investment , 1999 .

[10]  A. Tversky,et al.  Judgment under Uncertainty: Heuristics and Biases , 1974, Science.

[11]  R. Shiller,et al.  Why Did the Nikkei Crash? Expanding the Scope of Expectations Data Collection , 1996 .

[12]  Ian A. Cooper,et al.  Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium , 1994 .

[13]  Martin Weber,et al.  Judged knowledge and ambiguity aversion , 1995 .

[14]  R. Zajonc.  Attitudinal effects of mere exposure. , 1968 .

[15]  W. Ziemba,et al.  Arbitrage Strategies for Cross-Track Betting on Major Horse Races , 1990 .

[16]  R. M. Stulz,et al.  A model of international asset pricing , 1981 .

[17]  A. Low.  Essays on asymmetric information in international finance , 1992 .

[18]  Terrance Odean.  Do Investors Trade Too Much? , 1998 .

[19]  A. Tversky,et al.  Preference and belief: Ambiguity and competence in choice under uncertainty , 1991 .

[20]  Martin Weber,et al.  The impact of endowment framing on market prices -- an experimental analysis , 2000 .

[21]  Carl-Axel S. Staël von Holstein,et al.  Probabilistic forecasting: An experiment related to the stock market , 1972 .

[22]  H. Henry Cao,et al.  International Portfolio Investment Flows , 1997 .

[23]  A. Bovenberg,et al.  Why is Capital so Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation , 1994 .

[24]  K. Lewis,et al.  Trying to Explain Home Bias in Equities and Consumption , 1999 .

[25]  René M. Stulz,et al.  International Portfolio Choice and Asset Pricing: An Integrative Survey , 1994 .

[26]  Dilek Önkal,et al.  An exploratory analysis of portfolio managers' probabilistic forecasts of stock prices , 1994 .

[27]  M. Lovell,et al.  Tests of the Rational Expectations Hypothesis , 1986 .

[28]  Thomas Gehrig.  An Information Based Explanation of the Domestic Bias in International Equity Investment , 1993 .

[29]  M. Statman,et al.  Foreign Stocks in Behavioral Portfolios , 1999 .

[30]  F. Black.  International capital market equilibrium with investment barriers , 1974 .

[31]  J. Frank Yates,et al.  Probabilistic forecasts of stock prices and earnings: The hazards of nascent expertise , 1991 .

[32]  Stacey M. Whitecotton.  The effects of experience and a decision aid on the slope, scatter, and bias of earnings forecasts , 1996 .

[33]  Dilek Önkal,et al.  Effects of task format on probabilistic forecasting of stock prices , 1996 .

[34]  B. Fischhoff,et al.  Calibration of probabilities: the state of the art to 1980 , 1982 .

[35]  Ingrid M. Werner,et al.  Home Bias and the High Turnover , 1992 .

[36]  René M. Stulz,et al.  Why is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan , 1995 .

[37]  Janet A. Sniezek,et al.  Influences on the appropriateness of confidence in judgment: Practice, effort, information, and decision-making , 1991 .

[38]  L. Brown,et al.  Earnings Forecasting Research: Its Implications for Capital Markets Research , 1993 .

[39]  H. Levy,et al.  International Diversification of Investment Portfolios , 1970 .

[40]  Craig R. Fox,et al.  Ambiguity Aversion and Comparative Ignorance , 1995 .

[41]  S. Werlang,et al.  Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio , 1992 .

[42]  René M. Stulz,et al.  Chapter 6 International portfolio choice and asset pricing: An integrative survey , 1995, Finance.

[43]  D. Keefer,et al.  Three-Point Approximations for Continuous Random Variables , 1983 .

[44]  Bernard Dumas,et al.  International Portfolio Choice and Corporation Finance: A Synthesis , 1983 .

[45]  E. Fama,et al.  Efficient Capital Markets : II , 2007 .

[46]  Bruno H. Solnik,et al.  An equilibrium model of the international capital market , 1974 .

[47]  Mark T. Spence.  Problem-Problem Solver Characteristics Affectingthe Calibration of Judgments , 1996 .