@Article{mfj:717,
title={Domestic versus International Portfolio Selection: A Statistical Examination of the Home Bias},
author={Larry Gorman and Bjorn Jorgensen},
journal={Multinational Finance Journal},
volume={6},
number={3/4},
pages={131--166},
year=2002,
publisher={Multinational Finance Society; Global Business Publications},
url={http://www.mfsociety.org/../modules/modDashboard/uploadFiles/journals/MJ~696~p16tam9f14eb4jok1ea6onculb1.pdf}
keywords={efficient allocation; foreign exchange hedging; home bias; international allocation; portfolio},
abstract={The observed international home bias has traditionally been viewed as an anomaly. This paper provides statistical evidence contrary to this view within a mean-variance framework. Two methods of estimating the expected return and covariance parameters are investigated: (i) the traditional Markowitz approach, and (ii) the Bayes-Stein "shrinkage" algorithm. In-sample tests reveal that neither the Markowitz tangency allocation vectors nor the Bayes-Stein tangency allocation vectors are significantly different than a 100% domestic allocation (i.e. extreme home bias). These results are robust to the shorting of equity and across foreign exchange hedge strategies. The paper also reports out-of-sample tests with a view toward investment performance. Typically, a 100% domestic allocation outperforms both the Bayes-Stein and Markowitz tangency portfolios. Overall, the theorized gains to international diversification appear difficult to capture in practice and, hence, investors exhibiting a strong home bias are not necessarily acting irrationally..},
}