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

Tiago Berriel () and Saroj Bhattarai

American Economic Journal: Macroeconomics, 2013, vol. 5, issue 1, 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)

JEL-codes: F30 G11 G15 H61 H63 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/mac.5.1.102
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Citations: View citations in EconPapers (37)

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