Hedging Against the Government: A Solution to the Home Asset Bias Puzzle

Posted: 9 Jul 2021

See all articles by Tiago C. Berriel

Tiago C. Berriel

affiliation not provided to SSRN

Saroj Bhattarai

University of Texas at Austin - Department of Economics

Date Written: 2012

Abstract

This paper explains two puzzling facts: international nominal bonds and equity portfolios are biased domestically. In our two-country model, holding domestic government nominal debt provides a hedge against shocks to bond returns and the impact on taxes they induce. For this result, only two features are essential: some nominal risk and taxes falling only on domestic agents. A third feature explains why agents choose to hold primarily domestic equity: government spending falls on domestic goods. Then, an increase in government spending raises the returns on domestic equity, providing a hedge against the subsequent increase in taxes. These conclusions are robust to a wide range of preference parameter values and the incompleteness of financial markets. A calibrated version of the model predicts asset holdings that quantitatively match the data.

JEL Classification: F30, F41, G11

Suggested Citation

Berriel, Tiago C. and Bhattarai, Saroj, Hedging Against the Government: A Solution to the Home Asset Bias Puzzle (2012). Globalization and Monetary Policy Institute Working Paper No. 113, Available at SSRN: https://ssrn.com/abstract=3878626

Tiago C. Berriel (Contact Author)

affiliation not provided to SSRN

No Address Available

Saroj Bhattarai

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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