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Home Bias in Open Economy Financial Macroeconomics

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  • Nicolas Coeurdacier
  • Hélène Rey

Abstract

Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modeling that incorporate international portfolio choices in standard twocountry general equilibrium models. We refer to this new literature as Open Economy Financial Macroeconomics. We focus on three broad classes of explanations: (i) hedging motives in frictionless financial markets (real exchange rate and nontradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), and (iii) informational frictions and behavioral biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on cross-border asset holdings across different types of assets: equities, bonds and bank lending and new micro data on institutional holdings of equity at the fund level. These data should inform macroeconomic modeling of the open economy and a growing literature of models of delegated investment. (JEL E13, F41, G11, G12, G15)

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

Volume (Year): 51 (2013)
Issue (Month): 1 (March)
Pages: 63-115

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Handle: RePEc:aea:jeclit:v:51:y:2013:i:1:p:63-115

Note: DOI: 10.1257/jel.51.1.63
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Cited by:
  1. Jonathan Heathcote & Fabrizio Perri, 2013. "Assessing International Efficiency," Working Papers 476, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Zheng Liu & Mark M. Spiegel, 2013. "Monetary policy regimes and capital account restrictions in a small open economy," Working Paper Series 2013-33, Federal Reserve Bank of San Francisco.
  3. Finn Marten Körner & Hans-Michael Trautwein, 2013. "Sovereign Credit Ratings and the Transnationalization of Finance - Evidence from a Gravity Model of Portfolio Investment," ZenTra Working Papers in Transnational Studies 20 / 2013, ZenTra - Center for Transnational Studies, revised Feb 2014.
  4. Gourinchas, Pierre-Olivier & Rey, Hélène & Truempler, Kai, 2012. "The financial crisis and the geography of wealth transfers," Journal of International Economics, Elsevier, vol. 88(2), pages 266-283.
  5. Mehl, Arnaud, 2013. "Large global volatility shocks, equity markets and globalisation: 1885-2011," Working Paper Series 1548, European Central Bank.
  6. Gianni La Cava, 2013. "Liquidity Shocks and the US Housing Credit Crisis of 2007–2008," RBA Research Discussion Papers rdp2013-05, Reserve Bank of Australia.
  7. Mishra, Anil, 2013. "Measures of Equity Home Bias Puzzle," MPRA Paper 51223, University Library of Munich, Germany.
  8. Gajewski, Krzysztof & Olszewski, Krzysztof & Pawłowska, Małgorzata & Rogowski, Wojciech & Tchorek, Grzegorz & Zięba, Jolanta, 2012. "Integracja finansowa w Europie po wprowadzeniu euro. Przegląd literatury
    [Financial integration in Europe after the introduction of the euro. A literature overview]
    ," MPRA Paper 42482, University Library of Munich, Germany.
  9. Paolo Angelini & Giuseppe Grande & Fabio Panetta, 2014. "The negative feedback loop between banks and sovereigns," Questioni di Economia e Finanza (Occasional Papers) 213, Bank of Italy, Economic Research and International Relations Area.
  10. Hamano Masashige, 2012. "International equity and bond positions in a DSGE model with variety risk in consumption," CREA Discussion Paper Series 12-05, Center for Research in Economic Analysis, University of Luxembourg.
  11. Faruk Balli & Syed Abul Basher & Faisal Rana, 2014. "The determinants of the volatility of returns on cross-border asset holdings," CAMA Working Papers 2014-01, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  12. Karen K. Lewis, 2011. "Global Asset Pricing," NBER Working Papers 17261, National Bureau of Economic Research, Inc.
  13. Chun Chang & Zheng Liu & Mark M. Spiegel, 2013. "Capital controls and optimal Chinese monetary policy," Working Paper Series 2012-13, Federal Reserve Bank of San Francisco.

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