This paper presents a rational expectations model of asset prices with rationally inattentive investors that, unlike previous papers, explains both the substantial amount of equity wealth invested domestically and the puzzling time series behavior of the home bias - an initial plateau before...

We derive the optimal currency portfolio of an equity investor with no forecasting ability. This can be estimated based on observable parameters, including equity and currency covariances and the proportion of the investor's wealth held in risky assets. The currency position depends on the...

There is pervasive evidence that individuals invest primarily in domestic assets and thus hold poorly diversified portfolios. Empirical studies suggest that informational asymmetries may play a role in explaining the bias towards domestic assets. In contrast, theoretical studies based on...

Purpose - It is crucial to find a better portfolio optimization strategy, considering the cryptocurrencies' asymmetric volatilities. Hence, this research aimed to present dynamic optimization on minimum variance (MVP), equal risk contribution (ERC) and most diversified portfolio (MDP)....

By allowing for imperfectly informed markets and the role of private information, we offer new insights about observed deviations of portfolio concentrations in domestic relative to foreign risky assets, or "home bias", from what standard finance models predict. Our model ascribes the "bias" to...

This paper builds a model in which an agent infrequently adjusts her portfolio holdings of home and foreign equities. Since an investor on average holds on to her portfolio holdings for a longer duration, with volatile real exchange rate returns, her foreign equity holdings are likely to drift...

This paper proposes a general equilibrium model which features endogenous cross-country heterogeneity in conditional risk aversion and shows that it can generate significant equity home bias. With complete markets, financing home consumption entails hedging against increases in home conditional...

This paper implements a parsimonious and practical methodology to examine the diversification potential of international equity portfolios. The analysis shows that the Portfolio Diversification Index (Rudin, A.M., and Morgan, J.S., Journal of Portfolio Management [2006]) efficiently replicates a...

This paper applies the mean-variance portfolio optimization (PO) approach and the stochastic dominance (SD) test to examine preferences for international diversification versus domestic diversification from American investors’ viewpoints. Our PO results imply that the domestic diversification...

The weak empirical evidence linking diversification and international equity flows calls into question the diversification paradigm at the international level and the analytical framework it implies. Using a novel measure of diversification that includes all the moments of the distribution of...