Consumption hedging and home-country bias in a model of international capital market equilibrium
AbstractPurpose – The purpose of this paper is to develop a model of international capital market equilibrium where investors exhibit home-country bias due to their desire to hedge real consumption. Design/methodology/approach – This paper posits a two-stage process of portfolio choice for the representative investor of a country. In the first step, the investor's benchmark portfolio is determined, whereas in the second step, his optimal portfolio is chosen. The latter portfolio maximizes the expected portfolio rate of return minus the risk tolerance weighted variance of tracking error. The market equilibrium implications of the portfolio optimality conditions are determine via aggregation across all investors and countries. Findings – A revised security market line is derived that differs from the traditional security market line in terms of vertical intercept, slope, and beta coefficient. It is demonstrated that the derived model may be interpreted as a multi-country generalization of the Chen-Boness extension of the capital asset pricing model under uncertain inflation. Originality/value – This paper presents an innovative application of Roll's tracking portfolio paradigm. Another novel feature is the derivation of the international capital market equilibrium implications of such portfolio choice behaviour.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Emerald Group Publishing in its journal Studies in Economics and Finance.
Volume (Year): 29 (2012)
Issue (Month): 1 (March)
Contact details of provider:
Web page: http://www.emeraldinsight.com
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
- Grauer, Frederick L. A. & Litzenberger, Robert H. & Stehle, Richard E., 1976. "Sharing rules and equilibrium in an international capital market under uncertainty," Journal of Financial Economics, Elsevier, vol. 3(3), pages 233-256, June.
- Kang, Jun-Koo & Stulz, Rene M., 1997.
"Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan,"
Journal of Financial Economics,
Elsevier, vol. 46(1), pages 3-28, October.
- Jun-Koo Kang & Rene M. Stulz, 1995. "Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan," NBER Working Papers 5166, National Bureau of Economic Research, Inc.
- Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
- Margarida Abreu & Victor Mendes & João A. Santos, 2010.
"Home Country Bias: Does Domestic Experience Help Investors Enter Foreign Markets?,"
Working Papers Department of Economics
2010/02, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Abreu, Margarida & Mendes, Victor & Santos, João A.C., 2011. "Home country bias: Does domestic experience help investors enter foreign markets?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2330-2340, September.
- Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004.
"Information costs and home bias: an analysis of US holdings of foreign equities,"
Journal of International Economics,
Elsevier, vol. 62(2), pages 313-336, March.
- Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers 691, Board of Governors of the Federal Reserve System (U.S.).
- Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
- Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-34, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.