Trying to Explain Home Bias in Equities and Consumption
Investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest, a phenomenon called "equity home bias." In the absence of this bias, investors would optimally diversify domestic output risk using foreign equities. Therefore, consumption growth rates would tend to co-move across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates, a phenomenon I call "consumption home bias." In this paper, I discuss these two biases and their potential relationship as suggested by the literature.
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Volume (Year): 37 (1999)
Issue (Month): 2 (June)
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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.:
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
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- Telmer, Chris I, 1993.
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"Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements,"
NBER Working Papers
3566, National Bureau of Economic Research, Inc.
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- Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
- Larry R. Gorman & Bjorn N. Jorgensen, 2002. "Domestic versus International Portfolio Selection: A Statistical Examination of the Home Bias," Multinational Finance Journal, Multinational Finance Journal, vol. 6(3-4), pages 131-166, September.
- Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
- Dumas, Bernard & Solnik, Bruno, 1995. " The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-479, June.
- Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-157, March.
- Bekaert, Geert, 1994. "Exchange rate volatility and deviations from unbiasedness in a cash-in-advance model," Journal of International Economics, Elsevier, vol. 36(1-2), pages 29-52, February.
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