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When Bonds Matter: Home Bias in Goods and Assets

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  • Nicolas Coeurdacier

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research)

  • Pierre-Olivier Gourinchas

    (UC Berkeley - University of California [Berkeley] - UC - University of California)

Abstract

This paper presents a model of international portfolios with real exchange rate and non financial risks that accounts for observed levels of equity home bias. A key feature is that investors can trade domestic and foreign bonds in addition to equities. Bonds matter: in equilibrium, investors structure their bond portfolio to hedge real exchange rate risks and equity home bias arises when non-financial income risk is negatively correlated with equity returns, after controlling for bond returns. Our framework allows us to derive equilibrium bond and equity portfolios in terms of sufficient statistics - directly measurable hedge ratios. We estimate equity and bond portfolios implied by the model for G-7 countries an find strong empirical support for the theory. We are able to account for a significant share of the equity home bias and obtain a currency exposure of bond portfolios comparable to the data.

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  • Nicolas Coeurdacier & Pierre-Olivier Gourinchas, 2015. "When Bonds Matter: Home Bias in Goods and Assets," SciencePo Working papers Main hal-03470191, HAL.
    • Handle: RePEc:hal:spmain:hal-03470191
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03470191
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    More about this item

    Keywords

    International risk sharing; International portfolios; Equity home bias;
    All these keywords.

    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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