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)
Berriel, Tiago C., and Saroj Bhattarai.
"Hedging against the Government: A Solution to the Home Asset Bias Puzzle."
American Economic Journal: Macroeconomics,
International Finance: General
Portfolio Choice; Investment Decisions
International Financial Markets
National Budget; Budget Systems
National Debt; Debt Management; Sovereign Debt