Home Bias in Open Economy Financial Macroeconomics
Journal of Economic Literature
vol. 51,
no. 1, March 2013
(pp. 63-115)
Abstract
Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modeling that incorporate international portfolio choices in standard twocountry general equilibrium models. We refer to this new literature as Open Economy Financial Macroeconomics. We focus on three broad classes of explanations: (i) hedging motives in frictionless financial markets (real exchange rate and nontradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), and (iii) informational frictions and behavioral biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on cross-border asset holdings across different types of assets: equities, bonds and bank lending and new micro data on institutional holdings of equity at the fund level. These data should inform macroeconomic modeling of the open economy and a growing literature of models of delegated investment. (JEL E13, F41, G11, G12, G15)Citation
Coeurdacier, Nicolas, and Hélène Rey. 2013. "Home Bias in Open Economy Financial Macroeconomics." Journal of Economic Literature, 51 (1): 63-115. DOI: 10.1257/jel.51.1.63JEL Classification
- E13 General Aggregative Models: Neoclassical
- F41 Open Economy Macroeconomics
- G11 Portfolio Choice; Investment Decisions
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- G15 International Financial Markets