Journal of Computations & Modelling

A Home Bias based on International Asset Pricing model

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  • Abstract

    This paper presents an international asset pricing model based on investors’ behaviour in the presence of asymmetric information about home and international markets. In this model, international asset allocation is based on the information availability about home and international assets. In these markets, only a proportion of international investors trade on home assets, and they are willing to pay for information costs in order to diversify their portfolios. Our model gives an explicit measure of market integration/segmentation through the international investor proportion trading in the home country. At equilibrium, this model has the merits of explaining the behavioral expected rate of return for different degrees of market segmentation. We suggest, in addition, an explanation of the home bias both in domestic and international settings. Under special assumptions, we obtain Merton’s (1987) model that characterizes the relation between home and international returns.