The Home Bias in Equities and Distribution Costs
64 Pages Posted: 8 Jun 2016
Date Written: 2010
We show that including distribution costs into a general equilibrium model of international portfolio choice contributes to explaining the 'home bias' in international equity investment. Our model is able to replicate observed investment positions for a wide range of parameter values, even if agents have an incentive to hedge labor income risk by purchasing foreign equity. This is because the existence of a retail sector affects both the correlation of domestic returns with the domestic price level and the correlation between financial and nonfinancial income.
Keywords: International Financial Market Integration, International Risk Sharing, Home Bias
JEL Classification: F41, G11, G15
Suggested Citation: Suggested Citation