Non-Equity Risks and Equity Home Bias

36 Pages Posted: 2 Mar 2006 Last revised: 18 Nov 2013

See all articles by Timothy K. Chue

Timothy K. Chue

Hong Kong Polytechnic University

Date Written: May 15, 2013

Abstract

A long literature focuses on equity risks only to conclude that the benefits in holding foreign stocks are substantial, and investors in practice allocate a much too heavy weight of their portfolios to domestic securities. We re-examine this conclusion by using a consumption-based approach, which can take the effects of nontraded wealth into account, even when its returns are not observable. Although there are significant benefits from further international consumption risk sharing, these benefits are not attainable using international equities as instruments. These findings are consistent with the ideas of Shiller (1993, 2003) and Athanasoulis and Shiller (2001), who argue that the world's largest macroeconomic risks cannot be effectively shared using existing securities.

Keywords: Equity home bias; International risk sharing; Non-equity risks; Euler equations; Consumption-based models

JEL Classification: F41, G11, G15

Suggested Citation

Chue, Timothy K., Non-Equity Risks and Equity Home Bias (May 15, 2013). AFA 2007 Chicago Meetings Paper, EFA 2006 Zurich Meetings Paper, Available at SSRN: https://ssrn.com/abstract=887280 or http://dx.doi.org/10.2139/ssrn.887280

Timothy K. Chue (Contact Author)

Hong Kong Polytechnic University ( email )

School of Accounting & Finance
Hung Hom
Kowloon
Hong Kong
(852) 2766-4995 (Phone)

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