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Industrial specialization matters: A new angle on equity home Bias

Chenyue Hu

Journal of International Economics, 2020, vol. 126, issue C

Abstract: This paper theoretically and empirically examines how industrial structure affects international portfolio diversification. I embed portfolio choice in a multi-country, multi-sector model in order to explore how sectoral productivity differences affect a country's risk exposure and hence influence home bias. The model predicts that investors from highly specialized economies who want to hedge their risk have a strong incentive to avoid domestic assets. I confirm the prediction with the data by finding that home bias is negatively correlated with a country's degree of industrial specialization. This finding unveils the interaction between intranational risk hedging across sectors and international risk hedging across countries.

Keywords: Home bias; Portfolio choice; Sectoral productivity; Industrial specialization (search for similar items in EconPapers)
JEL-codes: F36 F41 G11 G15 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jinteco.2020.103354

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Handle: RePEc:eee:inecon:v:126:y:2020:i:c:s0022199620300702