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Review of Quantitative Finance and Accounting

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12.03.2016 | Original Research

Home bias in portfolio choices: social learning among partially informed agents

verfasst von: Wen-Lin Wu, Yin-Feng Gau

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 2/2017

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Abstract

Using an ‘incomplete information’ model, we explore the role of social learning in the global portfolio choices of stock market investors. When partially informed followers attempt to estimate true domestic (home) mean returns, they likely acquire private domestic signals from partially informed leaders. However, the calibration results indicate the existence of home bias when partially informed agents have poor quality information. Partially informed agents are prone to a learning bias; they overreact to new domestic information due to overconfidence in their domestic private signals, but they demonstrate a conservative response to new information in foreign markets. Links between the private signals of partially informed agents may lead to correlated foreign investment strategies among such agents through social learning. We suggest the acquisition of private signals, along with the dissemination of information, affect international portfolio decision rules and are determinants of the phenomenon of home bias.

Vorheriger Artikel The effects of firms’ information environment on analysts’ herding behavior

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This tendency is confirmed by growing evidence on home bias, as demonstrated by Karlsson and Norden (2007) and Lutje and Menkhoff (2007).

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Merton (1980) demonstrates that in reality, expected returns are notoriously more difficult to estimate than variances; Chopra and Ziemba (1993) suggest that accurate means forecasting is critical to mean–variance frameworks.

Regardless of the value taken by \(\xi\) and ϕ, the optimal portfolio weight of all agents is still restricted to within the range of 0 ≤ θ _B ≤ 1.

Brandt et al. (2004) suggest that conservatism could be interpreted as a person’s overconfidence in his or her ability to learn.

Social learning can also arise as a result of a change in the behavior of the followers in our study, resulting in their acting against the crowd (Eyster and Rabin 2011; Park and Sabourian 2011); that is, some followers have contrarian behavior in the model, viewing the good news possessed by their leaders as a signal of bad news, such that they expect a reversal in current trends. Therefore, their estimation of the mean domestic returns may be more accurate than their better-informed leaders, because their domestic private signal relates negatively to that of their counterparts (ρ _L,F = − 0.99). Their contrarian behavior also enlarges their information sets and enhances their prior beliefs. Under the same scenario, they may have less hedging demand for their global portfolio choices than their leaders, such that they lean toward the benchmark weights suggested by mean–variance optimization.

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Titel: Home bias in portfolio choices: social learning among partially informed agents
verfasst von: Wen-Lin Wu
Yin-Feng Gau
Publikationsdatum: 12.03.2016
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 2/2017
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-016-0560-6

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