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  3. American Economic Journal: Macroeconomics
  4. January 2013
  5. Hedging against the Government: A Solution to the Home Asset Bias Puzzle

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

  • Tiago C. Berriel
  • Saroj Bhattarai
American Economic Journal: Macroeconomics
vol. 5, no. 1, January 2013
(pp. 102-34)
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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.5.1.102

Additional 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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