Do Nontraded Goods Explain the Home Bias Puzzle?

35 Pages Posted: 27 Feb 1997 Last revised: 9 Apr 2010

See all articles by Paolo A. Pesenti

Paolo A. Pesenti

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Eric van Wincoop

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 1996

Abstract

Interpretations of the home bias puzzle in international finance have fre- quently focused on the role of fluctuations in domestic nontraded output, through their effects on the marginal utility of tradables consumption. This paper assesses the empirical evidence of this aproach, by deriving an explicit solution for the optimal international portfolio and applying the model to a set of fourteen OECD countries. Computing asset returns according to a `fundamentals' approach, it is possible to account for an average gap of no more than 10-15 percantage points between estimated domestic ownership shares and domestic shares under full diversification. When stock-market data are directly used, the predicted coefficient of home bias shrinks to 3%.

Suggested Citation

Pesenti, Paolo A. and van Wincoop, Eric, Do Nontraded Goods Explain the Home Bias Puzzle? (October 1996). NBER Working Paper No. w5784. Available at SSRN: https://ssrn.com/abstract=4692

Paolo A. Pesenti (Contact Author)

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Eric Van Wincoop

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