Title: Demystifying the 'home bias' effect: the benefits of international diversification
Authors: John Galakis; Nicolas Skourias; Vivi Firdauzi
Addresses: Iniohos Advisory Services, Avenue Industrielle 4-6, 1227 Carouge Geneva, Switzerland ' Iniohos Advisory Services, Avenue Industrielle 4-6, 1227 Carouge Geneva, Switzerland ' Iniohos Advisory Services, Avenue Industrielle 4-6, 1227 Carouge Geneva, Switzerland
Abstract: The present study aims to highlight the beneficial virtues of diversification through internationalisation and distribution to multiple asset classes, traditional and alternative, for a Greek investor who exhibits a historically high local bias. A special reference is made to public pension funds that are 'forced' to invest, predominantly, in Greek assets, and, especially Greek Government securities, due to a very restrictive and binding legal framework. Applying modern portfolio theory to explore the potential benefits of holding international assets together with Greek assets, and monthly data covering the December 1998-March 2015 period, we confirm the benefits of international diversification. We find that if Greek investors allocate a substantial part of their risk budget in foreign markets, they can achieve significant reduction in portfolio risk and superior portfolio return. Local asset portfolios clearly represent a sub-optimal solution. The results hold for different stages of the economic cycle (recessions and/or expansions).
Keywords: pension funds; international diversification; home bias; portfolio efficiency; asset allocation; Greece; internationalisation; government securities; international assets; foreign markets; portfolio risk; portfolio returns; local assets.
DOI: 10.1504/IJPAM.2015.077110
International Journal of Portfolio Analysis and Management, 2015 Vol.2 No.1, pp.36 - 56
Received: 25 Jun 2015
Accepted: 23 Jul 2015
Published online: 21 Jun 2016 *