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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
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    Web page: http://www.EconomicDynamics.org/society.htm
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