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Hedging against the Government: A Solution to the Home Asset Bias Puzzle

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  • Tiago C. Berriel
  • Saroj Bhattarai

Abstract

We explain why international nominal bonds and equity portfolios are biased domestically. In our model, holding domestic government nominal debt provides a hedge against shocks to bond returns and the impact on taxes they induce. For this result, only two features are essential: nominal risk and taxes only on domestic agents. A third feature explains domestically biased equity holdings: government spending falls on domestic goods. Then, an increase in government spending raises the returns on domestic equity, providing a hedge against the subsequent increase in taxes. A calibrated version of the model predicts asset holdings that quantitatively match the data. (JEL F30, G11, G15, H61, H63)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 5 (2013)
Issue (Month): 1 (January)
Pages: 102-34

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Handle: RePEc:aea:aejmac:v:5:y:2013:i:1:p:102-34

Note: DOI: 10.1257/mac.5.1.102
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  1. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2003. "International risk-sharing and the transmission of productivity shocks," Working Papers 03-19, Federal Reserve Bank of Philadelphia.
  2. David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report 145, Federal Reserve Bank of Minneapolis.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Hedging against the government: a solution to the home asset bias puzzle
    by Christian Zimmermann in NEP-DGE blog on 2012-06-18 19:26:57
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Cited by:
  1. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
  2. Jonathan Heathcote & Fabrizio Perri, 2013. "Assessing International Efficiency," Working Papers 476, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Katrin Rabitsch & Serhiy Stepanchuk & Viktor Tsyrennikov, 2014. "International Portfolios: A Comparison of Solution Methods," Department of Economics Working Papers wuwp159, Vienna University of Economics, Department of Economics.

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