International Home Bias in International Finance and Business Cycles

Karen Lewis

No 6351, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Domestic investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest. This phenomenon has been called equity home bias.' In the absence of this home bias, investors would optimally diversify away domestic output risk. Therefore, in a world without investor home bias, consumption growth rates would tend to comove across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates. Moreover, consumption growth in each country appears to be highly correlated with its own output growth relative to the world. This phenomenon may be called consumption home bias.' In this paper, I evaluate existing explanations for these two types of home bias.

JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 1998-01
Note: AP IFM
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Citations: View citations in EconPapers (17)

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