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. 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: C1 F3 G3 (search for similar items in EconPapers)
Date: 2016-03-01
New Economics Papers: this item is included in nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Journal of International Economics, 1, March, 2016, 99(1), pp. S78-S96. ISSN: 0022-1996

Downloads: (external link)
http://eprints.lse.ac.uk/64835/ 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 (2015)
Working Paper: Human capital and international portfolio diversification: a reappraisal (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:64835

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().