scholarly journals Measures of Equity Home Bias Puzzle

2013 ◽  
Author(s):  
Anil V. Mishra
Keyword(s):  
Home Bias ◽  
Equity Home Bias ◽  
Home Bias Puzzle

TASTE SHOCKS, ENDOGENOUS LABOR SUPPLY, AND EQUITY HOME BIAS

2013 ◽  
Vol 18 (7) ◽  
pp. 1466-1487 ◽  
Author(s):  
Ling Feng
Keyword(s):  
Exchange Rate ◽  
Labor Supply ◽  
Home Bias ◽  
Dynamic Stochastic General Equilibrium ◽  
Labor Income ◽  
Endogenous Labor Supply ◽  
Equity Home Bias ◽  
Home Bias Puzzle ◽  
Dynamic Stochastic ◽  
Endogenous Labor

The puzzling bias of equity portfolios toward domestic assets (equity home bias) remains substantial. This paper proposes a dynamic stochastic general equilibrium model and demonstrates that shocks to consumption tastes (taste shocks) are an effective explanation for the equity home bias puzzle. In the model, home assets provide insurance for home agents to hedge against domestic taste fluctuations, whereas such insurance cannot be offered by foreign assets. The empirical evidence shows that, in explaining equity home bias, hedging against consumption taste risks is more relevant than hedging against labor income risks or real exchange rate risks.

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