K.U.Leuven - Faculty of Economics and Applied Economics
DTEW - AFI_0616 pages:1-35
We generalize the Cooper and Kaplanis (1994) methodology for estimating the costs that couldreconcile international portfolio holdings with CAPM predictions. First, we simultaneouslyestimate inward and outward investment costs and even interactions between home and hostcountry. Second, the risk aversion parameter is estimated rather than postulated. Third, wedetect costs for domestic investments. We ¯nd that the home bias in equity portfolios is relatedto a mixture of market frictions, such as information asymmetries, institutional factors andexplicit costs. Over the period 2001-2004, the average implicit investment costs range from0.26 (US) to 16 (Turkey) percent per annum.