Trying to Explain Home Bias in Equities and Consumption

Karen Lewis

Journal of Economic Literature, 1999, vol. 37, issue 2, 571-608

Abstract: Investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest, a phenomenon called "equity home bias." In the absence of this bias, investors would optimally diversify domestic output risk using foreign equities. Therefore, consumption growth rates would tend to co-move 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, a phenomenon I call "consumption home bias." In this paper, I discuss these two biases and their potential relationship as suggested by the literature.

JEL-codes: E21 G11 G12 G15 G23 (search for similar items in EconPapers)
Date: 1999
Note: DOI: 10.1257/jel.37.2.571
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Citations: View citations in EconPapers (774)

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