International Home Bias in International Finance and Business Cycles

70 Pages Posted: 15 Sep 2000 Last revised: 4 Apr 2008

See all articles by Karen K. Lewis

Karen K. Lewis

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: January 1998

Abstract

Domestic investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest. This phenomenon has been called equity home bias.' In the absence of this home bias, investors would optimally diversify away domestic output risk. Therefore, in a world without investor home bias, consumption growth rates would tend to comove across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates. Moreover, consumption growth in each country appears to be highly correlated with its own output growth relative to the world. This phenomenon may be called consumption home bias.' In this paper, I evaluate existing explanations for these two types of home bias.

Suggested Citation

Lewis, Karen Kay, International Home Bias in International Finance and Business Cycles (January 1998). NBER Working Paper No. w6351, Available at SSRN: https://ssrn.com/abstract=226102

Karen Kay Lewis (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER)

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