Do Nontraded Goods Explain the Home Bias Puzzle? / Paolo Pesenti, Eric van Wincoop.

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Pesenti, Paolo

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5784.Publication details: Cambridge, Mass. National Bureau of Economic Research 1996.Description: 1 online resource: illustrations (black and white)Online resources:

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Abstract: Interpretations of the home bias puzzle in international finance have fre- quently focused on the role of fluctuations in domestic nontraded output, through their effects on the marginal utility of tradables consumption. This paper assesses the empirical evidence of this aproach, by deriving an explicit solution for the optimal international portfolio and applying the model to a set of fourteen OECD countries. Computing asset returns according to a `fundamentals' approach, it is possible to account for an average gap of no more than 10-15 percantage points between estimated domestic ownership shares and domestic shares under full diversification. When stock-market data are directly used, the predicted coefficient of home bias shrinks to 3%.

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Working Paper	Biblioteca Digital	Colección NBER	nber w5784 (Browse shelf(Opens below))	Not For Loan

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October 1996.

Interpretations of the home bias puzzle in international finance have fre- quently focused on the role of fluctuations in domestic nontraded output, through their effects on the marginal utility of tradables consumption. This paper assesses the empirical evidence of this aproach, by deriving an explicit solution for the optimal international portfolio and applying the model to a set of fourteen OECD countries. Computing asset returns according to a `fundamentals' approach, it is possible to account for an average gap of no more than 10-15 percantage points between estimated domestic ownership shares and domestic shares under full diversification. When stock-market data are directly used, the predicted coefficient of home bias shrinks to 3%.