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Trying to Explain Home Bias in Equities and Consumption (1999)
| Venue: | Journal of Economic Literature |
| Citations: | 458 - 7 self |
BibTeX
@ARTICLE{Lewis99tryingto,
author = {Karen K. Lewis},
title = {Trying to Explain Home Bias in Equities and Consumption},
journal = {Journal of Economic Literature},
year = {1999},
pages = {571--608}
}
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Abstract
Domestic investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest, a phenomenon called "equity home bias. " In the absence of this bias, investors would optimally diversify domestic output risk using foreign equities. Therefore, consumption growth rates would tend to comove across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates, a phenomenon I call "consumption home bias. " In this paper, I discuss these two biases and their potential relationship. I appreciate useful suggestions and comments from three anonymous referees and John Pencavel, the editor. I am also grateful to Michael Adler, Urban Jermann, and Amir Yaron for helpful discussions. Any errors or omissions are my responsibility alone. 1 Do individuals hold the optimal portfolio? Do they do a good job of hedging risks? The answer to these questions are clearly important for understanding the economy. If individuals indeed hedge risk optimally, then resources are allocated to their most efficient uses. If not, then many other questions arise. Why not? What is the explanation for these inefficiencies? And what
Keyphrases
explain home bias consumption growth rate output growth rate consumption home bias domestic asset wealth portfolio anonymous referee useful suggestion amir yaron foreign equity domestic investor optimal portfolio helpful discussion standard portfolio theory john pencavel domestic output risk efficient us michael adler potential relationship many question equity home bias urban jermann good job
