International Portfolio Diversification and Assets Allocation Bias

Abstract

The purpose of this paper is to assess the evolution of home bias in assets allocation over time and to test the effect
of financial markets frictions on the equities portfolio holding. Our findings show that all countries present a
substantial home bias in their portfolio holding and that investors are unaware of the benefit of diversification and
under-weight the foreign securities in their portfolios instead of holding the world market portfolio of risky assets,
as suggested by the traditional portfolio theory. The empirical estimates based on a comparison between the
version of ICAPM in the absence of frictions in financial markets and the version in the presence of friction reveal
that the geography of assets trade is explained by several variables as economic and financial development and
other factors related to corporate governance and the level of investor protection.