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Can trade costs in goods explain home bias in assets?

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  • van Wincoop, Eric
  • Warnock, Francis E.

Abstract

A debate has raged in the general equilibrium literature on the impact of trade costs on portfolio home bias. In all of these models there is a simple, easily observed covariance-variance ratio. We compute this term using data on real exchange rates and asset returns. The resulting portfolio home bias is close to zero, implying that GE models that create home bias through trade costs are not grounded in empirical reality. Our results enable the GE literature to move forward, but in a way in which the theoretical models are not at odds with an easily observed empirical regularity.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 6 (October)
Pages: 1108-1123

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:6:p:1108-1123

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Portfolio home bias Trade costs;

References

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Citations

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Cited by:
  1. Diyarbakirlioglu, Erkin, 2011. "Foreign equity flows and the “Size Bias”: Evidence from an emerging stock market," Emerging Markets Review, Elsevier, vol. 12(4), pages 485-509.
  2. Heathcote, Jonathan & Perri, Fabrizio, 2013. "Assessing International Efficiency," CEPR Discussion Papers 9424, C.E.P.R. Discussion Papers.
  3. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, vol. 87(2), pages 205-215.

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