Relative Optimism and the Home Bias Puzzle

Review of Finance, Forthcoming

45 Pages Posted: 21 Feb 2014 Last revised: 7 May 2016

See all articles by Bruno Solnik

Bruno Solnik

Hong Kong University of Science & Technology (HKUST) - Department of Finance ; HEC Paris - Departement Finance et Economie

Luo Zuo

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: May 6, 2016

Abstract

We study whether relative optimism leads to home bias in portfolio holdings by looking at two novel databases: a survey that includes expectations of identified professional asset management companies for equity, bonds and currencies, and the IMF portfolio holdings data for equity and bonds. We document that relative optimism for equity is persistent over the period 1997 to 2012, but relative optimism for bonds and currencies exhibits more time-series variation. Moreover, we show that relative optimism is an economically significant variable that helps explain home bias in portfolio holdings, not only for equity, but also for bonds.

Keywords: Expectations, Relative Optimism, Familiarity, Home Bias

JEL Classification: G02, G15

Suggested Citation

Solnik, Bruno and Zuo, Luo, Relative Optimism and the Home Bias Puzzle (May 6, 2016). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2398737 or http://dx.doi.org/10.2139/ssrn.2398737

Bruno Solnik

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

HEC Paris - Departement Finance et Economie ( email )

1, rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 39 67 72 84 (Phone)
+33 1 39 67 70 85 (Fax)

Luo Zuo (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

349 Sage Hall
Ithaca, NY 14853
United States
607-255-4002 (Phone)

HOME PAGE: http://www.johnson.cornell.edu/faculty-research/faculty/lz352/

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