Nontraded Goods, Nontraded Factors, and International Non-Diversification
Boston University - Department of Economics; National Bureau of Economic Research (NBER)
Urban J. Jermann
University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)
Robert G. King
Boston University - Department of Economics; Federal Reserve Bank of Richmond - Research Department; National Bureau of Economic Research (NBER)
NBER Working Paper No. w5175
Can the presence of nontraded consumption goods explain the high degree of 'home bias' displayed by investor portfolios? We find that the answer is no, so long as individuals have access to free international trade in financial assets. In particular, it is never optimal to exhibit home bias with respect to domestic traded-good equities. By contrast, an optimal portfolio may exhibit substantial home bias with respect to nontraded-good equities, although this result requires a very low degree of substitution between traded and nontraded goods in the utility function. Further, our analysis uncovers a second puzzle: the composition of investors' portfolios appears to be strongly at variance with the predictions of the model that incorporates nontraded goods.
Number of Pages in PDF File: 27working papers series
Date posted: July 20, 2000
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.531 seconds