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Keywords:

  • International diversification;
  • home bias;
  • relative preferences;
  • international CAPM
  • F30;
  • G11;
  • G12;
  • G15

Abstract

We argue that when individuals care about their consumption relative to that of their neighbours, a home bias emerges, that is investors overweight domestic stocks in their portfolios. Domestic stocks are preferred because they also serve the objective of mimicking the economic fortunes and welfare of the investor's neighbours, countrymen, and social reference group. We also demonstrate that globalization mitigates the home bias, and derive a modified international CAPM.