When Bonds Matter: Home Bias in Goods and Assets

Nicolas Coeurdacier and Pierre-Olivier Gourinchas

Working Papers from HAL

Abstract: This paper presents a model of international portfolios with real exchange rate and non financial risks that accounts for observed levels of equity home bias. A key feature is that investors can trade domestic and foreign bonds in addition to equities. Bonds matter: in equilibrium, investors structure their bond portfolio to hedge real exchange rate risks and equity home bias arises when non-financial income risk is negatively correlated with equity returns, after controlling for bond returns. Our framework allows us to derive equilibrium bond and equity portfolios in terms of sufficient statistics - directly measurable hedge ratios. We estimate equity and bond portfolios implied by the model for G-7 countries an find strong empirical support for the theory. We are able to account for a significant share of the equity home bias and obtain a currency exposure of bond portfolios comparable to the data.

Keywords: International risk sharing; International portfolios; Equity home bias (search for similar items in EconPapers)
Date: 2015-03-01
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03470191v1
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Related works:
Journal Article: When bonds matter: Home bias in goods and assets (2016)
Working Paper: When bonds matter: Home bias in goods and assets (2016)
Working Paper: When bonds matter: Home bias in goods and assets (2016)
Working Paper: When Bonds Matter: Home Bias in Goods and Assets (2015)
Working Paper: When Bonds Matter: Home Bias in Goods and Assets (2011)
Working Paper: When Bonds Matter: Home Bias in Goods and Assets (2011)
Working Paper: When bonds matter: home bias in goods and assets (2009)
Working Paper: When bonds matter: home bias in goods and assets (2009)
Working Paper: When bonds matter: home bias in goods and assets (2008)
Working Paper: When Bonds Matter: Home Bias in Goods and Assets (2008)
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