Human capital and international portfolio diversification: a reappraisal

Lorenzo Bretscher, Christian Julliard and Carlo Rosa

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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. 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. Second, 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. Third, we show that, given the high degree of international GDP correlations in the data, very small domestic redistributive shocks are sufficient to skew portfolios toward domestic assets.

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: F30 G11 G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015-10-08
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Downloads: (external link)
http://eprints.lse.ac.uk/119454/ Open access version. (application/pdf)

Related works:
Chapter: Human Capital and International Portfolio Diversification: A Reappraisal (2016)
Journal Article: 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)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119454

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