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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/mac.5.1.102 (application/pdf)
http://www.aeaweb.org/aej/mac/data/2011-0125_data.zip (application/zip)
http://www.aeaweb.org/aej/mac/app/2011-0125_app.pdf (application/pdf)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Hedging against the government: a solution to the home asset bias puzzle (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmac:v:5:y:2013:i:1:p:102-34

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Journal: Macroeconomics is currently edited by Simon Gilchrist

More articles in American Economic Journal: Macroeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().