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A study on equity home bias using vine copula approach

Author

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  • Garg, Jyoti
  • Karmakar, Madhusudan
  • Paul, Samit
Abstract
The study investigates if the mean-downside risk optimization technique for asset allocation can shed new light on the equity home bias puzzle. We propose a combined EGARCH-EVT-C-vine copula approach to properly capture the stylized properties of asset return series and estimate the downside risk appropriately by CVaR. Using weekly stock price data from 12 countries including seven G7 countries and five BRICS countries, we estimate international portfolio allocations based on mean-CVaR optimization model and compare the results to the mean–variance allocations. The study has been done from the perspective of US investors. The results of the study suggest that the US equity home bias is overestimated by the mean–variance approach. The mean-CVaR model helps to factor in the additional risk that investors face in international portfolio diversification and provides a plausible empirical explanation for the equity home bias phenomenon. The findings of the study have direct implications for portfolio managers and investors for taking better international investment decisions based on the knowledge of optimum portfolio.

Suggested Citation

  • Garg, Jyoti & Karmakar, Madhusudan & Paul, Samit, 2023. "A study on equity home bias using vine copula approach," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:ecofin:v:64:y:2023:i:c:s1062940822001954
    DOI: 10.1016/j.najef.2022.101860
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    References listed on IDEAS

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    Cited by:

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    2. Yao, Yinhong & Li, Jingyu & Chen, Wei, 2024. "Multiscale extreme risk spillovers among the Chinese mainland, Hong Kong, and London stock markets: Comparing the impacts of three Stock Connect programs," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1217-1233.

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    More about this item

    Keywords

    CVaR; Home bias; Vine copula; Downside risk; Portfolio optimization;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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