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Industrial specialization matters: A new angle on equity home Bias

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  • Hu, Chenyue

Abstract

This paper theoretically and empirically examines how industrial structure affects international portfolio diversification. I embed portfolio choice in a multi-country, multi-sector model in order to explore how sectoral productivity differences affect a country's risk exposure and hence influence home bias. The model predicts that investors from highly specialized economies who want to hedge their risk have a strong incentive to avoid domestic assets. I confirm the prediction with the data by finding that home bias is negatively correlated with a country's degree of industrial specialization. This finding unveils the interaction between intranational risk hedging across sectors and international risk hedging across countries.

Suggested Citation

  • Hu, Chenyue, 2020. "Industrial specialization matters: A new angle on equity home Bias," Journal of International Economics, Elsevier, vol. 126(C).
  • Handle: RePEc:eee:inecon:v:126:y:2020:i:c:s0022199620300702
    DOI: 10.1016/j.jinteco.2020.103354
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    More about this item

    Keywords

    Home bias; Portfolio choice; Sectoral productivity; Industrial specialization;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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