Human capital and international portfolio choice

Christian Julliard

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

Abstract: This paper shows that in a non-representative agent model in which households face short selling constraints and labor income risk, in the form of both uninsurable shocks and a common aggregate component, small differences in the correlation between aggregate labor income shocks and domestic and foreign stock market returns lead to a very large home bias in asset holdings. Calibrating this buffer-stock saving model to match both microeconomic and macroeconomic U.S. labor income data, I demonstrate that, consistent with the empirical literature, a) investors that enter the stock market will initially specialize in domestic assets, b) individual portfolios become more internationally diversified, adding foreign stocks one at a time, as the level of asset wealth increases, and c) most importantly, the implied aggregate portfolio of U.S. investors shows a large degree of home bias consistent with observed levels.

Keywords: Home Bias; International Diversification; Human Capital; Labor Income Risk; Buffer-Stock Saving; Optimal Portfolio Choice (search for similar items in EconPapers)
JEL-codes: F30 G11 G15 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2004-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:4813

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