Wealthier people generally hold a larger part of their savings in risky assets. Using the US Survey of Consumer Finances, I show that wealthier households also have a higher portfolio share of foreign assets. This relative home bias of the poor does not seem to be explained by fixed participation costs alone, as the portfolio share of foreign assets increases with financial wealth even among participants in foreign asset markets. This paper shows how both biases of poorer agents' portfolios, towards safe and home assets, can arise in a simple 2 country economy with income and portfolio heterogeneity. Poor investors are naturally biased against domestic equity when wages and capital returns are positively correlated, making equity a bad hedge against fluctuations in labour income relative to bonds. Moreover poor investors prefer home to foreign bonds if equilibrium terms of trade movements systematically lead to a fall in the purchasing power of domestic assets in periods of high wages. I show that this is likely to be the case if aggregate supply shocks at home are more important than abroad. Finally, the model shows that aggregate home bias in the country portfolio implies relative home bias of the poor and vice versa.
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Paper provided by European University Institute in its series Economics Working Papers with number
ECO2008/28.
Length: Date of creation: 2008 Date of revision: Handle: RePEc:eui:euiwps:eco2008/28
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References listed on IDEAS 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.:
John Y. Campbell, 2006.
"Household Finance,"
NBER Working Papers
12149, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
John Y. Campbell, 2006.
"Household Finance,"
Journal of Finance,
American Finance Association, vol. 61(4), pages 1553-1604, 08.
[Downloadable!] (restricted)