International portfolio diversification with generalized expected utility preferences:
This paper revisits the Home Bias Puzzle -- the relatively low interna- tional diversification of portfolios. We suggest that part of the diversifi- cation puzzle may be due to reliance on the conventional CAPM model as the benchmark predicting patterns of diversification. We compare the asset diver...
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| Main Author: | |
|---|---|
| Format: | Book |
| Language: | English |
| Published: |
Cambridge, Mass.
1997
|
| Series: | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series
5965 |
| Subjects: | |
| Online Access: | Volltext |
| Summary: | This paper revisits the Home Bias Puzzle -- the relatively low interna- tional diversification of portfolios. We suggest that part of the diversifi- cation puzzle may be due to reliance on the conventional CAPM model as the benchmark predicting patterns of diversification. We compare the asset diver- sification patterns of agents who maximize a generalized expected utility (GEU) to the diversification of agents who maximize the conventional expected utility (EU). Specifically, we derive the patterns of diversification for agents who maximize a rank-dependent' expected utility, attaching more weight to bad' than to good' outcomes, in contrast to the probability weights used in a conventional expected utility maximization. We show that agents who maximize a GEU exhibit first order risk aversion and tend to refrain from di- versification in contrast to the diversification of agents who maximize the EU. For a given covariance structure we identify a c̀one of diversifica- tion -- the range of domestic and foreign yields leading to a positive demand for both equities. Greater downside risk aversion increases the threshold of yields leading to diversification, shifting the cone of diversification upwards and rightwards. Thus, greater downsiderisk aversion narrows the range of foreign yields leading to diversification for a given domestic yield. Ceteris paribus, greater downside risk aversion reduces the feasible hetero- geneity of normalized excess yields associated with diversification. Conse- quently, we argue that first order risk aversion should be added to the explanatory factors that account for the observed diversification patterns. |
| Physical Description: | 22 S. |
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| 490 | 1 | |a National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |v 5965 | |
| 520 | |a This paper revisits the Home Bias Puzzle -- the relatively low interna- tional diversification of portfolios. We suggest that part of the diversifi- cation puzzle may be due to reliance on the conventional CAPM model as the benchmark predicting patterns of diversification. We compare the asset diver- sification patterns of agents who maximize a generalized expected utility (GEU) to the diversification of agents who maximize the conventional expected utility (EU). Specifically, we derive the patterns of diversification for agents who maximize a rank-dependent' expected utility, attaching more weight to bad' than to good' outcomes, in contrast to the probability weights used in a conventional expected utility maximization. We show that agents who maximize a GEU exhibit first order risk aversion and tend to refrain from di- versification in contrast to the diversification of agents who maximize the EU. For a given covariance structure we identify a c̀one of diversifica- tion -- the range of domestic and foreign yields leading to a positive demand for both equities. Greater downside risk aversion increases the threshold of yields leading to diversification, shifting the cone of diversification upwards and rightwards. Thus, greater downsiderisk aversion narrows the range of foreign yields leading to diversification for a given domestic yield. Ceteris paribus, greater downside risk aversion reduces the feasible hetero- geneity of normalized excess yields associated with diversification. Conse- quently, we argue that first order risk aversion should be added to the explanatory factors that account for the observed diversification patterns. | ||
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| illustrated | Not Illustrated |
| indexdate | 2024-07-09T18:13:54Z |
| institution | BVB |
| language | English |
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| series | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |
| series2 | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |
| spelling | Aizenman, Joshua 1949- Verfasser (DE-588)124080057 aut International portfolio diversification with generalized expected utility preferences Joshua Aizenman Cambridge, Mass. 1997 22 S. txt rdacontent n rdamedia nc rdacarrier National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series 5965 This paper revisits the Home Bias Puzzle -- the relatively low interna- tional diversification of portfolios. We suggest that part of the diversifi- cation puzzle may be due to reliance on the conventional CAPM model as the benchmark predicting patterns of diversification. We compare the asset diver- sification patterns of agents who maximize a generalized expected utility (GEU) to the diversification of agents who maximize the conventional expected utility (EU). Specifically, we derive the patterns of diversification for agents who maximize a rank-dependent' expected utility, attaching more weight to bad' than to good' outcomes, in contrast to the probability weights used in a conventional expected utility maximization. We show that agents who maximize a GEU exhibit first order risk aversion and tend to refrain from di- versification in contrast to the diversification of agents who maximize the EU. For a given covariance structure we identify a c̀one of diversifica- tion -- the range of domestic and foreign yields leading to a positive demand for both equities. Greater downside risk aversion increases the threshold of yields leading to diversification, shifting the cone of diversification upwards and rightwards. Thus, greater downsiderisk aversion narrows the range of foreign yields leading to diversification for a given domestic yield. Ceteris paribus, greater downside risk aversion reduces the feasible hetero- geneity of normalized excess yields associated with diversification. Conse- quently, we argue that first order risk aversion should be added to the explanatory factors that account for the observed diversification patterns. Mathematisches Modell Investment analysis Mathematical models Investments, Foreign Mathematical models Portfolio management Mathematical models Risk perception Mathematical models Utility theory Mathematical models Erscheint auch als Online-Ausgabe National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series 5965 (DE-604)BV002801238 5965 http://papers.nber.org/papers/w5965.pdf kostenfrei Volltext |
| spellingShingle | Aizenman, Joshua 1949- International portfolio diversification with generalized expected utility preferences National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series Mathematisches Modell Investment analysis Mathematical models Investments, Foreign Mathematical models Portfolio management Mathematical models Risk perception Mathematical models Utility theory Mathematical models |
| title | International portfolio diversification with generalized expected utility preferences |
| title_auth | International portfolio diversification with generalized expected utility preferences |
| title_exact_search | International portfolio diversification with generalized expected utility preferences |
| title_full | International portfolio diversification with generalized expected utility preferences Joshua Aizenman |
| title_fullStr | International portfolio diversification with generalized expected utility preferences Joshua Aizenman |
| title_full_unstemmed | International portfolio diversification with generalized expected utility preferences Joshua Aizenman |
| title_short | International portfolio diversification with generalized expected utility preferences |
| title_sort | international portfolio diversification with generalized expected utility preferences |
| topic | Mathematisches Modell Investment analysis Mathematical models Investments, Foreign Mathematical models Portfolio management Mathematical models Risk perception Mathematical models Utility theory Mathematical models |
| topic_facet | Mathematisches Modell Investment analysis Mathematical models Investments, Foreign Mathematical models Portfolio management Mathematical models Risk perception Mathematical models Utility theory Mathematical models |
| url | http://papers.nber.org/papers/w5965.pdf |
| volume_link | (DE-604)BV002801238 |
| work_keys_str_mv | AT aizenmanjoshua internationalportfoliodiversificationwithgeneralizedexpectedutilitypreferences |