Testing for potential portfolio performance and index efficiency: an application to the equity home bias puzzle.

Abstract

The object is this thesis is twofold. First to provide a survey of existing literature on testing procedures for portfolio efficiency, and second to investigate a well-known puzzle of the modern finance literature, the home equity bias puzzle. Several multivariate tests of portfolio efficiency are discussed in the theoretical part. In the empirical part, selected tests are implemented to test the efficiency of international portfolios of institutional investors. The results show that most portfolios were efficient over the period 1992-1999, as a result of good performance in most national equity markets, whereas our initial belief was that EMU portfolios should have been more efficient than non-EMU portfolios in the 90s, as a result of increased foreign equity holding.