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Hedging against the government: a solution to the home asset bias puzzle

Author

Listed:
  • Berriel, Tiago C.
  • Bhattarai, Saroj

Abstract

This paper explains two puzzling facts: international nominal bonds and equity portfolios are biased domestically. In our two-country model, holding domestic government nominal debt provides a hedge against shocks to bond returns and the impact on taxes they induce. For this result, only two features are essential: some nominal risk and taxes falling only on domestic agents. A third feature explains why agents choose to hold primarily domestic equity: government spending falls on domestic goods. Then, an increase in government spending raises the returns on domestic equity, providing a hedge against the subsequent increase in taxes. These conclusions are robust to a wide range of preference parameter values and the incompleteness of financial markets. A calibrated version of the model predicts asset holdings that quantitatively match the data.

Suggested Citation

  • Berriel, Tiago C. & Bhattarai, Saroj, 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.
  • Handle: RePEc:fip:feddgw:113
    Note: Published as: Berriel, Tiago C. and Saroj Bhattarai (2013), "Hedging Against the Government: A Solution to the Home Asset Bias Puzzle," American Economic Journal: Macroeconomics 5 (1): 102-134.
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    File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0113.pdf
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    References listed on IDEAS

    as
    1. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 443-473.
    2. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-888, September.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Hedging against the government: a solution to the home asset bias puzzle
      by Christian Zimmermann in NEP-DGE blog on 2012-06-19 00:26:57

    Citations

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    Cited by:

    1. repec:bis:bisbps:95 is not listed on IDEAS
    2. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    3. Coeurdacier, Nicolas & Gourinchas, Pierre-Olivier, 2016. "When bonds matter: Home bias in goods and assets," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 119-137.
    4. Rabitsch, Katrin & Stepanchuk, Serhiy & Tsyrennikov, Viktor, 2015. "International portfolios: A comparison of solution methods," Journal of International Economics, Elsevier, vol. 97(2), pages 404-422.
    5. Heathcote, Jonathan & Perri, Fabrizio, 2014. "Assessing International Efficiency," Handbook of International Economics, Elsevier.
    6. Tobias Broer, 2008. "The home bias of the poor: terms of trade effects and portfolios across the wealth distribution," Economics Working Papers ECO2008/28, European University Institute.
    7. Gauti Eggertsson & Bulat Gafarov & Saroj Bhatarai, 2014. "Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing," 2014 Meeting Papers 1292, Society for Economic Dynamics.
    8. repec:eee:eecrev:v:101:y:2018:i:c:p:376-396 is not listed on IDEAS
    9. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    10. Illenin Kondo & Fabrizio Perri & Sewon Hur, 2016. "Inflation, Debt, and Default," 2016 Meeting Papers 1610, Society for Economic Dynamics.
    11. Filippo Brutti & Philip Sauré, 2016. "Repatriation Of Debt In The Euro Crisis," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 145-174, February.
    12. Tiago Berriel & Rodrigo Abreu, 2015. "Long Term Debt and Credit Crisis in a Liquidity Constrained Economy," Textos para discussão 644, Department of Economics PUC-Rio (Brazil).

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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