Hedging against the Government: A Solution to the Home Asset Bias Puzzle
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)
Volume (Year): 5 (2013)
Issue (Month): 1 (January)
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- Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2003.
"International risk-sharing and the transmission of productivity shocks,"
03-19, Federal Reserve Bank of Philadelphia.
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- Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2005. "International risk-sharing and the transmission of productivity shocks," International Finance Discussion Papers 826, Board of Governors of the Federal Reserve System (U.S.).
- Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2004. "International Risk Sharing and the Transmission of Productivity Shocks," CEPR Discussion Papers 4746, C.E.P.R. Discussion Papers.
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"International Evidence on the Historical Properties of Business Cycles,"
92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
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- David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report 145, Federal Reserve Bank of Minneapolis.
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