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Taste Shocks, Endogenous Labor Supply, And Equity Home Bias

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  • Feng, Ling

Abstract

The puzzling bias of equity portfolios toward domestic assets (equity home bias) remains substantial. This paper proposes a dynamic stochastic general equilibrium model and demonstrates that shocks to consumption tastes (taste shocks) are an effective explanation for the equity home bias puzzle. In the model, home assets provide insurance for home agents to hedge against domestic taste fluctuations, whereas such insurance cannot be offered by foreign assets. The empirical evidence shows that, in explaining equity home bias, hedging against consumption taste risks is more relevant than hedging against labor income risks or real exchange rate risks.

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  • Feng, Ling, 2014. "Taste Shocks, Endogenous Labor Supply, And Equity Home Bias," Macroeconomic Dynamics, Cambridge University Press, vol. 18(7), pages 1466-1487, October.
    • Handle: RePEc:cup:macdyn:v:18:y:2014:i:07:p:1466-1487_00
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    Cited by:

    1. Curatola, Giuliano & Dergunov, Ilya, 2023. "International capital markets with interdependent preferences: Theory and empirical evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 403-421.
    2. Kim, Kyounghun & Kim, Sunghyun Henry, 2021. "Explaining equity home bias using hedging motives against real exchange rate and wage risks," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 30-43.

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