Can trade costs in goods explain home bias in assets?

Wincoop, Eric van; Warnock, Francis E.

doi:10.1016/j.jimonfin.2009.12.003

Cited by 44 publications

(14 citation statements)

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“…We find preliminary support for this mechanism using panel data for the G7 countries. This is in contrast to the results of van Wincoop and Warnock (2010), who find no systematic correlation between fluctuations in the empirical-based real exchange rate (which only imperfectly capture changes in the number of varieties) and equity returns. Our paper points to a correlation between fluctuations in the welfare-based real exchange rate and equity returns.…”

contrasting

confidence: 99%

International equity and bond positions in a DSGE model with variety risk in consumption

Hamano

2015

Journal of International Economics

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JEL classification: F12 F41 F43 Keywords:Real exchange rate Home biased equity puzzle Firm entry Firm heterogeneity This paper analyzes equity and bond positions in a two-country Dynamic Stochastic General Equilibrium model where the number of varieties, i.e., the extensive margins of products available to consumers, is endogenously determined. Fluctuations in the welfare-based real exchange rate, including those in the number of varieties, matter to international consumption risk sharing. We investigate the implication of such "variety risk" for the optimal portfolio choice and show that the variety risk generates home-biased equity positions, strengthening those obtained with the standard model in the literature. We also find preliminary empirical support for the mechanism.

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confidence: 99%

International equity and bond positions in a DSGE model with variety risk in consumption

Hamano

2015

Journal of International Economics

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“…However, empirically these explanations have not fared very well. van Wincoop and Warnock (2010) show that the second explanation can explain virtually no home bias at all. Bottazzi et al (1996) and Julliard and Rosa (2009) find that the non-traded asset explanation also does not generate much home bias.…”

Section: Derivation Of Gravity Equationmentioning

confidence: 97%

“…All we can say is that currently there is no theory justifying such specifications and it is best for empirical work to be consistent with existing theory. rates, van Wincoop and Warnock (2010) show that hedging real exchange rate risk cannot account for portfolio home bias. Consistent with these findings, Coeurdacier (2009) develops an extension of Obstfeld and Rogoff (2000) to show that for realistic model parameters trade barriers cannot generate a portfolio home bias.…”

Section: Introductionmentioning

confidence: 99%

Gravity in International Finance

Okawa

Wincoop

2012

Journal of International Economics

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166

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“…One direction for future research would be to extend the model to include both equities and bonds and introduce additional shocks. Recent empirical works by van Wincoop and Warnock (2008) and Coeurdacier and Gourinchas (2009) show that hedging the real exchange rate risk occurs largely through international bond holdings, since relative bond returns are strongly correlated with real exchange rate fluctuations. Moreover, the unconditional correlation between excess equity returns and the real exchange rate is too low to tackle the equity home bias observed in the data.…”

Section: Discussionmentioning

confidence: 99%

Equity home bias, incomplete financial markets, and nominal rigidities

Pang

2011

Canadian J of Economics

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This paper analyzes optimal portfolio decisions in a monetary open-economy framework. It is found that market completeness and the specific form of nominal rigidities, namely, nominal price vs. nominal wage rigidities, matter for justifying the observed structure of equity holdings. When markets are complete, sticky prices generate a negative correlation between the non-diversifiable labour income and the profit of domestic firms with respect to the productivity shocks, which explains why households invest little abroad. In contrast, when markets are incomplete, rigidities in goods prices result in a counterfactual 'super home bias', because domestic equities provide a good hedge against not only the labour income risk but also the relative price risk. Wage rigidities, however, have the opposite effect. Therefore, nominal rigidities in both goods prices and wage rates are needed to address the empirical composition of gross equity positions under incomplete markets. JEL classification: F30, F41, G11Biais vers les titres domestiques, marchés financiers incomplets, et rigidités nominales. Ce mémoire analyse les décisions optimales de portefeuilles dans le cadre d'uneéconomie monétaire ouverte. On découvre que la complétude des marchés et la forme spécifique des rigidités nominales (rigidité des prix nominaux ou du salaire nominal) portentà conséquence quand on veut expliquer la structure observée des titres détenus. Quand les marchés sont complets, des prix visqueux engendrent une corrélation négative entre les revenus du travail non-diversifiables et le profit des firmes domestiques faceà des chocs de productivité. Voilà qui explique pourquoi les ménages investissent peuà l'étranger. A contrario, quand les marchés sont incomplets, des rigidités dans le prix des biens résultent en un super-biais vers les titres domestiques, parce que les titres domestiques fournissent une bonne protection non seulement contre le risque dans le revenu du travail mais aussi I am extremely grateful to Michael B. Devereux for advice, guidance, and encouragement. I also thank Equity home bias, incomplete financial markets 341 dans les prix relatifs. Les rigidités de salaires ont l'effet opposé. En conséquence, on doit prendre en compte les rigidités nominalesà la fois dans les prix des biens et dans les taux de salaires pour comprendre la composition empirique des portefeuilles quand les marchés sont incomplets.

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Can trade costs in goods explain home bias in assets?

Cited by 44 publications

References 44 publications

International equity and bond positions in a DSGE model with variety risk in consumption

International equity and bond positions in a DSGE model with variety risk in consumption

Gravity in International Finance

Equity home bias, incomplete financial markets, and nominal rigidities

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