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The home bias of the poor: terms of trade effects and portfolios across the wealth distribution

  • Tobias Broer

    (Stockholm University)

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    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 terms of trade 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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    File URL: https://www.economicdynamics.org/meetpapers/2013/paper_618.pdf
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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 618.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:618
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    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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    8. Fernanda Nechio, 2010. "Foreign stock holdings: the role of information," Working Paper Series 2010-26, Federal Reserve Bank of San Francisco.
    9. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
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    13. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
    14. Fabrice Collard & Harris Dellas & Behzad Diba & Alan Stockman, 2009. "Goods Trade and International Equity Portfolios," School of Economics Working Papers 2009-14, University of Adelaide, School of Economics.
    15. Harold L. Cole & Maurice Obstfeld, 1989. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
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    17. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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