Human capital and international portfolio diversification: A reappraisal

Lorenzo Bretscher, Christian Julliard and Carlo Rosa

Journal of International Economics, 2016, vol. 99, issue S1, S78-S96

Abstract: We study the implications of human capital hedging for international portfolio choice. First, we document that, at the household level, the degree of home country bias in equity holdings is increasing in the labor income to financial wealth ratio. Second, we show that a heterogeneous agent model in which households face short selling constraints and labor income risk, calibrated to match both micro and macro labor income and asset returns data, can both rationalize this finding and generate a large aggregate home country bias in portfolio holdings. Third, we find that the empirical evidence supporting the belief that the human capital hedging motive should skew domestic portfolios toward foreign assets, is driven by an econometric misspecification rejected by the data.

Keywords: Home country bias; Incomplete markets; International diversification puzzle; Non-traded human capital; Hedging human capital; Optimal portfolio choice (search for similar items in EconPapers)
JEL-codes: E21 F30 G11 G15 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Related works:
Chapter: Human Capital and International Portfolio Diversification: A Reappraisal (2016)
Working Paper: Human capital and international portfolio diversification: a reappraisal (2016)
Working Paper: Human capital and international portfolio diversification: a reappraisal (2015)
Working Paper: Human capital and international portfolio diversification: a reappraisal (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:99:y:2016:i:s1:p:s78-s96

DOI: 10.1016/j.jinteco.2015.12.007

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