The home bias of the poor: Terms of trade effects and portfolios across the wealth distribution
This paper documents how poorer and less educated US households hold a smaller fraction of foreign assets in their financial portfolio. This average home bias of the poor is partly due to a lower probability of participating in foreign asset markets, often attributed to fixed costs of market entry. However, portfolio shares also rise with wealth among those households that do hold foreign assets, which fixed participation costs cannot explain. I use a simple, standard two-country general equilibrium model to show that hedging of real exchange rate movements and non-financial income risk, commonly employed to explain aggregate country-level home bias, also produces non-trivial heterogeneity in portfolios across wealth levels within countries that is in line with the evidence.
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- Akito Matsumoto & Charles Engel, 2009.
"The International Diversification Puzzle when Goods Prices Are Sticky: It's Really About Exchange-Rate Hedging, not Equity Portfolios,"
IMF Working Papers
09/12, International Monetary Fund.
- Charles Engel & Akito Matsumoto, 2009. "The International Diversification Puzzle When Goods Prices Are Sticky: It's Really about Exchange-Rate Hedging, Not Equity Portfolios," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 155-88, July.
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Levine's Working Paper Archive
2070, David K. Levine.
- Tiago C. Berriel & Saroj Bhattarai, 2012.
"Hedging against the government: a solution to the home asset bias puzzle,"
Globalization and Monetary Policy Institute Working Paper
113, Federal Reserve Bank of Dallas.
- Tiago C. Berriel & Saroj Bhattarai, 2013. "Hedging against the Government: A Solution to the Home Asset Bias Puzzle," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(1), pages 102-34, January.
- Bottazzi, Laura & Pesenti, Paolo & van Wincoop, Eric, 1996. "Wages, profits and the international portfolio puzzle," European Economic Review, Elsevier, vol. 40(2), pages 219-254, February.
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