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Human capital and international portfolio diversification: A reappraisal

Listed author(s):
  • Bretscher, Lorenzo
  • Julliard, Christian
  • Rosa, Carlo

We study the implications of human capital hedging for international portfolio choice. First, we document that, at the household level, the degree of home country bias in equity holdings is increasing in the labor income to financial wealth ratio. Second, we show that a heterogeneous agent model in which households face short selling constraints and labor income risk, calibrated to match both micro and macro labor income and asset returns data, can both rationalize this finding and generate a large aggregate home country bias in portfolio holdings. Third, we find that the empirical evidence supporting the belief that the human capital hedging motive should skew domestic portfolios toward foreign assets, is driven by an econometric misspecification rejected by the data.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022199615001816
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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 99 (2016)
Issue (Month): S1 ()
Pages: 78-96

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Handle: RePEc:eee:inecon:v:99:y:2016:i:s1:p:s78-s96
DOI: 10.1016/j.jinteco.2015.12.007
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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