Da. Glassman et La. Riddick, WHY EMPIRICAL INTERNATIONAL PORTFOLIO MODELS FAIL - EVIDENCE THAT MODEL MISSPECIFICATION CREATES HOME ASSET BIAS, Journal of international money and finance, 15(2), 1996, pp. 275-312
International portfolio models consistently predict that investors sho
uld put much more of their wealth into foreign assets than they actual
ly do-a result known as 'home asset bias'. We use actual international
portfolio data to show how model misspecification contributes to this
bias. We find that three widely-used simplifying assumptions produce
optimal portfolio weights that are significantly different from the we
ights produced by an unsimplified model. In particular, imposing the i
nvalid assumption that PPP holds exaggerates the degree of 'home asset
bias'. These findings suggest that researchers should pay greater att
ention to empirical model specification in the future. Copyright (C) 1
996 Elsevier Science Ltd.