Home bias among European investors from a Bayesian perspective |
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| Institution: | 1. UQ Business School, The University of Queensland, St Lucia, QLD 4072, Australia;2. College of Business, RMIT University, Melbourne, Victoria, Australia;1. Statistics Department, International Monetary Fund, Washington, D.C. 20431, USA;2. Research Department, International Monetary Fund, Washington, D.C. 20431, USA;1. School of Business, Providence College, 1 Cunningham Square, Providence, RI 02918, United States;2. Department of Finance, Real Estate and Business Law, University of Southern Mississippi, 118 College Drive, Hattiesburg, MS 39406, United States;3. Finance Department, The University of Tampa, 401 W. Kennedy Blvd., Tampa, FL 33606, United States;1. Goethe University Frankfurt, House of Finance, Theodor-W.-Adorno-Platz 3, Frankfurt am Main 60323, Germany;2. Landesbank Baden-Wuerttemberg, Am Hauptbahnhof 2, Stuttgart 70173, Germany |
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| Abstract: | This paper determines to what extent the estimated expect returns on European equity indices will be affected by different degrees of prior confidence in the ICAPM. We also measure how fragile the investors’ prior confidence in ICAPM should be in order to explain the home bias of European pension funds. A Bayesian approach is used to estimate the expected asset returns under different prior scenarios. We show that a moderate mistrust in ICAPM results in estimates of the expected returns, which substantially deviate from the estimates by ICAPM. Furthermore, we find a strong home bias in most countries, which cannot be explained by any degree of disbelief in the ICAPM. |
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