Foreign Direct Investment and the Equity Home Bias Puzzle

45 Pages Posted: 12 Mar 2020

See all articles by Sven Blank

Sven Blank

Deutsche Bundesbank - Research Centre

Mathias Hoffmann

Deutsche Bundesbank

Moritz A. Roth

Banco de España

Date Written: March 12, 2020

Abstract

The vast macroeconomic literature trying to explain the widely observed equity home bias disregards internationally active firms. In a DSGE model that features the endogenous choice of firms to become internationally active through either exports or foreign direct investment (FDI), we find that the optimal equity holdings of agents are biased towards domestic firms. Our finding indicates that international diversification is not as bad as empirical measures of the equity home bias suggest.

Keywords: country portfolios, multinational firms, international diversification, international trade, foreign direct investment

JEL Classification: F12, F21, F23, F41, G11

Suggested Citation

Blank, Sven and Hoffmann, Mathias and Roth, Moritz A., Foreign Direct Investment and the Equity Home Bias Puzzle (March 12, 2020). Banco de Espana Working Paper No. 2008, Available at SSRN: https://ssrn.com/abstract=3553245 or http://dx.doi.org/10.2139/ssrn.3553245

Sven Blank (Contact Author)

Deutsche Bundesbank - Research Centre ( email )

Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main
Germany

Mathias Hoffmann

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Moritz A. Roth

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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