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Journal of Economic Literature: Vol. 37 No. 2 (June 1999)

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Trying to Explain Home Bias in Equities and Consumption

Article Citation

Lewis, Karen K. 1999. "Trying to Explain Home Bias in Equities and Consumption." Journal of Economic Literature, 37(2): 571-608.

DOI: 10.1257/jel.37.2.571

Abstract

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 co-move 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 as suggested by the literature.

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Authors

Lewis, Karen K. (U PA and NBER)

JEL Classifications

G11: Portfolio Choice; Investment Decisions
G12: Asset Pricing; Trading volume; Bond Interest Rates
G15: International Financial Markets
G23: Pension Funds; Other Private Financial Institutions; Institutional Investors
E21: Macroeconomics: Consumption; Saving; Wealth


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