When Bonds Matter: Home Bias in Goods and Assets

60 Pages Posted: 26 Oct 2011 Last revised: 2 Nov 2011

See all articles by Nicolas Coeurdacier

Nicolas Coeurdacier

London Business School

Pierre-Olivier Gourinchas

University of California, Berkeley - Department of Economics; University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: October 27, 2011

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 equities as well as domestic and foreign real bonds. Bonds matter: in equilibrium, investors structure their bond portfolio to hedge real exchange rate risk since relative bond returns are strongly correlated with real exchange rate movements. Equity home bias does not arise from the co-movements between relative stock returns and real exchange rates, but from the hedging properties of stock returns against other sources of risk, conditionally on bond returns. We estimate the optimal equity and bond portfolios implied by the model for G-7 countries and 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.

Keywords: International risk sharing, International portfolios, Equity home bias

JEL Classification: F30, F41, G11

Suggested Citation

Coeurdacier, Nicolas and Gourinchas, Pierre-Olivier, When Bonds Matter: Home Bias in Goods and Assets (October 27, 2011). Available at SSRN: https://ssrn.com/abstract=1949737 or http://dx.doi.org/10.2139/ssrn.1949737

Nicolas Coeurdacier

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Pierre-Olivier Gourinchas (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://sites.google.com/view/pgourinchas

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States

HOME PAGE: http://sites.google.com/view/pgourinchas

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/pierre-olivier_gourinchas

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://cepr.org/active/publications/discussion_papers/authorlist.php?ident=136737

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
81
Abstract Views
1,003
Rank
437,962
PlumX Metrics