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Home bias in open economy financial macroeconomics

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  • Hélène Rey

    (Department of Economics, Harvard University)

  • Nicolas Coeurdacier

Abstract

Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modelling that incorporate international portfolio choices in standard two-country 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 non-tradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), (iii) informational frictions and behavioural biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on crossborder 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 modelling of the open economy and a growing literature of models of delegated investment.

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Handle: RePEc:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6

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Cited by:
  1. Pierre-Olivier Gourinchas & Hélène Rey & Kai Truempler, 2011. "The Financial Crisis and The Geography of Wealth Transfers," NBER Working Papers 17353, National Bureau of Economic Research, Inc.
  2. Mehl, Arnaud, 2013. "Large global volatility shocks, equity markets and globalisation: 1885-2011," Working Paper Series, European Central Bank 1548, European Central Bank.
  3. 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.
  4. Jonathan Heathcote & Fabrizio Perri, 2013. "Assessing International Efficiency," NBER Working Papers 18956, National Bureau of Economic Research, Inc.
  5. Kai Liu, 2014. "Dollar Hegemony and China’s Economy," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1410, Faculty of Economics, University of Cambridge.
  6. Chun Chang & Zheng Liu & Mark M. Spiegel, 2013. "Capital controls and optimal Chinese monetary policy," Working Paper Series, Federal Reserve Bank of San Francisco 2012-13, Federal Reserve Bank of San Francisco.
  7. 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.
  8. Karen K. Lewis, 2011. "Global Asset Pricing," NBER Working Papers 17261, National Bureau of Economic Research, Inc.
  9. Körner, Finn Marten & Trautwein, Hans-Michael, 2014. "Sovereign credit ratings and the transnationalization of finance: Evidence from a gravity model of portfolio investment," Economics Discussion Papers 2014-31, Kiel Institute for the World Economy.
  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. Zheng Liu & Mark M. Spiegel, 2013. "Monetary policy regimes and capital account restrictions in a small open economy," Working Paper Series, Federal Reserve Bank of San Francisco 2013-33, Federal Reserve Bank of San Francisco.
  12. 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.
  13. Gianni La Cava, 2013. "Liquidity Shocks and the US Housing Credit Crisis of 2007–2008," RBA Research Discussion Papers, Reserve Bank of Australia rdp2013-05, Reserve Bank of Australia.
  14. Mishra, Anil, 2013. "Measures of Equity Home Bias Puzzle," MPRA Paper 51223, University Library of Munich, Germany.

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