Hedging against the Government: A Solution to the Home Asset Bias Puzzle
- (pp. 102-34)
Abstract
We explain why international nominal bonds and equity portfolios are biased domestically. In our 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: nominal risk and taxes only on domestic agents. A third feature explains domestically biased equity holdings: 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. A calibrated version of the model predicts asset holdings that quantitatively match the data. (JEL F30, G11, G15, H61, H63)Citation
Berriel, Tiago C., and Saroj Bhattarai. 2013. "Hedging against the Government: A Solution to the Home Asset Bias Puzzle." American Economic Journal: Macroeconomics, 5 (1): 102-34. DOI: 10.1257/mac.5.1.102Additional Materials
JEL Classification
- F30 International Finance: General
- G11 Portfolio Choice; Investment Decisions
- G15 International Financial Markets
- H61 National Budget; Budget Systems
- H63 National Debt; Debt Management; Sovereign Debt
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