US investors hold much less foreign stocks than mean/variance analysis applied to historical data predicts. In this article, we investigate whether this home bias can be explained by Bayesian approaches to international asset allocation. In contrast to mean/variance analysis, Bayesian approaches...

U.S. investors hold much less international stock than is optimal according to mean-variance portfolio theory applied to historical data. We investigated whether this home bias can be explained by Bayesian approaches to international asset allocation. In comparison with mean-variance analysis,...

In investment practice, expected returns are assumed to be time-varying. Instrumental variables like dividend yields or term spreads are employed to predict expected returns. However, there is a substantial amount of estimation risk (or, parameter uncertainty) attached to these predictive...