|M.Sc Student||Sigalov Elena|
|Subject||Equity Home Bias in Israel|
|Department||Department of Industrial Engineering and Management||Supervisor||Professor Avner Bar Ilan|
The present study addresses the investment decisions of individuals and especially their choice between domestic and foreign stocks. The observation that individuals hold too little of their wealth in foreign assets has been called “home bias”. This paper investigates home bias puzzle in Israel. First purpose of our research is to examine the hypothesis of home bias in Israel. Home bias and its magnitude are examined over time. We would like to examine hypothesis that home bias magnitude decreases over time with economic growth. Second purpose of the research is to examine the hypothesis that home bias is implied by model selection and inputs estimation. We tried to identify home bias in stock and bond portfolios separately, and in stock and bond joint portfolio. For estimation expected return variance-covariance matrix we use direct estimation of historical data and Bayesian techniques. We think it is right to propose a new model to reduce fluctuations of optimal portfolio composition that’s named after adaptive expectation model. The model tries to integrate behavioral component which characterizes an investor in expected return forecasting procedure. Model intuition is that every year an investor matches expected returns from last period by current year changes. In another words, he matches the previous year prediction to current year occurrences by giving specific weight for these occurrences that is named after adaptive factor. We have found that the home bias exists both in stock portfolios, in bond portfolio and in stock and bond joint portfolio. The home bias magnitude is relatively high to bonds and joint portfolio. This results support the hypothesis that the home bias, somewhat, came from the fact that there were omitted assets in optimal portfolio allocation. Some years the phenomenon of negative home bias was observed both in stock portfolio and in bond portfolio. The decreasing home bias tendency really exists in bonds and joint portfolios. The stock portfolio demonstrates mixed home bias tendency for all the models and no real decreases. Adaptive expectation model implementation brought the home bias reducing in stock and joint portfolios over all the period. But there were not any differences of home bias magnitude in bond portfolio after adaptive expectation model implementation. Additionally, we found the evidence of investors’ mental frame existence. This frame is not enabling to change the portfolio composition when every asset change does not exceed 10%.