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Hedging against the Government: A Solution to the Home Asset Bias Puzzle

  • Tiago C. Berriel
  • Saroj Bhattarai

We explain why international nominal bonds and equity portfolios are biased domestically. In our model, holding domestic government nominal debt provides a hedge against shocks to bond returns and the impact on taxes they induce. For this result, only two features are essential: nominal risk and taxes only on domestic agents. A third feature explains domestically biased equity holdings: government spending falls on domestic goods. Then, an increase in government spending raises the returns on domestic equity, providing a hedge against the subsequent increase in taxes. A calibrated version of the model predicts asset holdings that quantitatively match the data. (JEL F30, G11, G15, H61, H63)

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 5 (2013)
Issue (Month): 1 (January)
Pages: 102-34

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Handle: RePEc:aea:aejmac:v:5:y:2013:i:1:p:102-34
Note: DOI: 10.1257/mac.5.1.102
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 443-473.
  2. David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
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