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The home bias in equities and distribution costs

Philipp Harms, Mathias Hoffmann () and Christina Ortseifer

No 2010,24, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank, Research Centre

Abstract: 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.

Keywords: International Financial Market Integration; International Risk Sharing; Home Bias (search for similar items in EconPapers)
JEL-codes: F41 G11 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-opm
Date: 2010
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