Portfolio Home Bias and External Habit Formation

57 Pages Posted: 17 Dec 2011 Last revised: 2 Mar 2021

See all articles by Andreas Stathopoulos

Andreas Stathopoulos

University of North Carolina (UNC) at Chapel Hill

Date Written: March 1, 2021

Abstract

This paper proposes a general equilibrium model which features endogenous cross-country heterogeneity in conditional risk aversion and shows that it can generate significant equity home bias. With complete markets, financing home consumption entails hedging against increases in home conditional risk aversion. When agents trade endowment claims, an increase in home risk aversion leads to a relative appreciation of the home claim due to an endogenous demand shock which raises the price of the home good, so home risk aversion shocks are hedged by home claim holdings. When agents trade dividend claims and the dividend share of income is sufficiently procyclical, home risk aversion shocks are hedged by agents' non-traded wealth and agents hold home-biased equity portfolios that are positively exposed to increases in home risk aversion.

Keywords: Portfolio home bias, habit formation, asset pricing

JEL Classification: G11, G12, G15, F30

Suggested Citation

Stathopoulos, Andreas, Portfolio Home Bias and External Habit Formation (March 1, 2021). Available at SSRN: https://ssrn.com/abstract=1973376 or http://dx.doi.org/10.2139/ssrn.1973376

Andreas Stathopoulos (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

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