Foreign Direct Investment and the Equity Home Bias Puzzle
45 Pages Posted: 12 Mar 2020
Date Written: March 12, 2020
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: Suggested Citation