Relative Optimism and the Home Bias Puzzle


Review of Finance

August 2017, vol. 21, n°5, pp.2045–2074

Departments: Finance

Keywords: G15 - International Financial Markets G02 - Behavioral Finance: Underlying Principles

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 International Monetary Fund portfolio holdings data for equity and bonds. We document that relative optimism for equity is persistent over the period 1997–2012, 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