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American Economic Journal: Macroeconomics: Vol. 5 No. 1 (January 2013)

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Hedging against the Government: A Solution to the Home Asset Bias Puzzle

Article Citation

Berriel, Tiago C., and Saroj Bhattarai. 2013. "Hedging against the Government: A Solution to the Home Asset Bias Puzzle." American Economic Journal: Macroeconomics, 5(1): 102-34.

DOI: 10.1257/mac.5.1.102

Abstract

We explain why international nominal bonds and equity portfolios are biased domestically. In our model, holding domestic government nominal debt provides a hedge against shocks to bond returns and the impact on taxes they induce. For this result, only two features are essential: nominal risk and taxes only on domestic agents. A third feature explains domestically biased equity holdings: government spending falls on domestic goods. Then, an increase in government spending raises the returns on domestic equity, providing a hedge against the subsequent increase in taxes. A calibrated version of the model predicts asset holdings that quantitatively match the data. (JEL F30, G11, G15, H61, H63)

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Authors

Berriel, Tiago C. (Getulio Vargas Foundation, Rio de Janeiro)
Bhattarai, Saroj (PA State U)

JEL Classifications

F30: International Finance: General
G11: Portfolio Choice; Investment Decisions
G15: International Financial Markets
H61: National Budget; Budget Systems
H63: National Debt; Debt Management; Sovereign Debt

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American Economic Journal: Macroeconomics


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