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The home bias of the poor: Terms of trade effects and portfolios across the wealth distribution

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  • Broer, Tobias
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    Abstract

    This paper documents how poorer and less educated US households hold a smaller fraction of foreign assets in their financial portfolio. This average home bias of the poor is partly due to a lower probability of participating in foreign asset markets, often attributed to fixed costs of market entry. However, portfolio shares also rise with wealth among those households that do hold foreign assets, which fixed participation costs cannot explain. I use a simple, standard two-country general equilibrium model to show that hedging of real exchange rate movements and non-financial income risk, commonly employed to explain aggregate country-level home bias, also produces non-trivial heterogeneity in portfolios across wealth levels within countries that is in line with the evidence.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8811.

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    Date of creation: Feb 2012
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    Handle: RePEc:cpr:ceprdp:8811

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    Related research

    Keywords: Heterogeneous Agents; Home Bias; Portfolio Choice; Terms of Trade;

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