Trying to Explain Home Bias in Equities and Consumption
- (pp. 571-608)
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.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.37.2.571JEL Classification
- 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