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Ambiguity Aversion in Asset Market: Experimental Study of Home Bias

Myung, Noah (2009) Ambiguity Aversion in Asset Market: Experimental Study of Home Bias. Social Science Working Paper, 1306. California Institute of Technology , Pasadena, CA. (Unpublished)

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The equity market home bias occurs when the investors over-invest in their home country assets. The equity market home bias is a paradox because the investors are not hedging their risk optimally. Even with unrealistic levels of risk aversion, the equity market home bias cannot be explained using the standard mean-variance model. We propose ambiguity aversion to be the behavioral explanation. We design six experiments using real world assets and derivatives to show the relationship between ambiguity aversion and home bias. We tested for ambiguity aversion by showing that the investor’s subjective probability is sub-additive. The result from the experiment provides support for the assertion that ambiguity aversion is related to the equity market home bias paradox.

Item Type:Report or Paper (Working Paper)
Additional Information:I owe many thanks to Ming Hsu, Colin Camerer, Peter Bossaerts, John O’Doherty, David Grether, Jaksa Cvitanic and Eileen Chou for their helpful comments and discussions. The experiments were graciously funded by Colin Camerer. I also thank Walter Yuan for introducing me to the world of PHP, MySQL and Apache server. I am grateful to seminar participants at Caltech, ESA International Meeting and BDRM Conference. Existing errors are my sole responsibility.
Group:Social Science Working Papers
Subject Keywords:Equity Market Home Bias, Mean-Variance Model, Ambiguity Aversion, Experiments
Series Name:Social Science Working Paper
Issue or Number:1306
Classification Code:JEL: C91, G11, G15
Record Number:CaltechAUTHORS:20170727-135623631
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79500
Deposited By: Jacquelyn Bussone
Deposited On:02 Aug 2017 21:24
Last Modified:03 Oct 2019 18:20

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