On the currency effect to home bias puzzle

Mao-Wei Hung, Mei-Lan Lo and Hsiao-Yuan Yu

Applied Economics Letters, 2010, vol. 17, issue 8, 815-822

Abstract: We propose an international asset allocation model to investigate whether home currency concern has impacts on home bias puzzle. Domestic investors choosing their international portfolios depend on home currency premium and thus will behave in home bias scenarios. Besides, the optimal portfolio suggests that it is isolated with nontradable and tradable consumptions. After employing the market-clearing condition, we price the equilibrium exchange rate and it tells that Interest Rate Parity (IRP) has more potential influence than Purchasing Power Parity (PPP) on exchange rate pricing in our model.

Date: 2010
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DOI: 10.1080/17446540802481839

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