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Trying to Explain Home Bias in Equities and Consumption

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  • Karen K. Lewis
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    Abstract

    Investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest, a phenomenon called "equity home bias." In the absence of this bias, investors would optimally diversify domestic output risk using foreign equities. Therefore, consumption growth rates would tend to co-move across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates, a phenomenon I call "consumption home bias." In this paper, I discuss these two biases and their potential relationship as suggested by the literature.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jel.37.2.571
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Literature.

    Volume (Year): 37 (1999)
    Issue (Month): 2 (June)
    Pages: 571-608

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    Handle: RePEc:aea:jeclit:v:37:y:1999:i:2:p:571-608

    Note: DOI: 10.1257/jel.37.2.571
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    1. The greatest evil of our time
      by chris dillow in Stumbling and Mumbling on 2006-06-15 09:29:14
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