Harms, Philipp Hoffmann, Mathias Ortseifer, Christina
Year of Publication:
Working Paper 10.03
We show that including distribution costs into a general equilibrium model of international portfolio choice contributes to explaining the "home bias" in international equity investment. Our model is able to replicate observed investment positions for a wide range of parameter values, even if agents have an incentive to hedge labor income risk by purchasing foreign equity. This is because the existence of a retail sector affects both the correlation of domestic returns with the domestic price level and the correlation between financial and nonfinancial income.
International Financial Market Integration International Risk Sharing Home Bias