Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83463
Authors: 
Báťa, Karel
Year of Publication: 
2010
Series/Report no.: 
IES Working Paper 7/2010
Abstract: 
Investors reveal a tendency to prefer domestic over foreign equities despite the financial losses. From institutional perspective the factors that cause home biasness are the barriers to entry the foreign markets, transaction costs, illiquidity, asymmetric information and information costs, corporate governance and inflation and exchange rate risks. Behavioral finance argues that irrationality of investors cause the home biasness. Investors tend to be under the influence of psychological biases: optimism, overconfidence, social identity, narrow framing and loss aversion. In this paper we introduce a model of optimal portfolio of Czech investors with three utility functions: Markowitz, exponential and CRRA. The prediction of the model without short selling suggests that Czech investors should have more than 60 % (between 72 - 83 % for feasible levels of risk aversion) in domestic equities. The OECD data claims that they hold around 87 % in domestic equities.
Subjects: 
equity home bias
optimal investment portfolio
behavioral finance
JEL: 
G11
Document Type: 
Working Paper
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