Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-11T08:50:12.764Z Has data issue: false hasContentIssue false
  • English
  • Français

TASTE SHOCKS, ENDOGENOUS LABOR SUPPLY, AND EQUITY HOME BIAS

Published online by Cambridge University Press:  03 April 2013

Ling Feng
Ling Feng*
Affiliation:
School of Finance, Shanghai University of Finance and Economics
*
Address correspondence to: Ling Feng, School of Finance, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai 200433, China; e-mail: feng.ling@mail.shufe.edu.cn.
Get access Rights & Permissions [Opens in a new window]

Abstract

The puzzling bias of equity portfolios toward domestic assets (equity home bias) remains substantial. This paper proposes a dynamic stochastic general equilibrium model and demonstrates that shocks to consumption tastes (taste shocks) are an effective explanation for the equity home bias puzzle. In the model, home assets provide insurance for home agents to hedge against domestic taste fluctuations, whereas such insurance cannot be offered by foreign assets. The empirical evidence shows that, in explaining equity home bias, hedging against consumption taste risks is more relevant than hedging against labor income risks or real exchange rate risks.

Keywords

Equity Home BiasTaste ShocksEndogenous Labor Supply
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 7 , October 2014 , pp. 1466 - 1487
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Ahearne, A., Griever, W., and Warnock, F. (2004) Information costs and home bias: An analysis of US holdings of foreign equities. Journal of International Economics 62 (2), 313–336.Google Scholar
Amadi, A. and Bergin, P. (2008) Understanding international portfolio diversification and turnover rates. Journal of International Financial Markets, Institutions and Money 18 (2), 191–206.Google Scholar
Anderson, J. and Van Wincoop, E. (2004) Trade costs. Journal of Economic Literature 42 (3), 691–751.CrossRefGoogle Scholar
Baxter, M. and Jermann, U. (1997) The international diversification puzzle is worse than you think. American Economic Review 97 (1), 170–180.Google Scholar
Benigno, P. and Nistico, S. (2012) International portfolio allocation under model uncertainty. American Economic Journal: Macroeconomics 4 (1), 144–189.Google Scholar
Bergin, P. (2006) How well can the New Open Economy Macroeconomics explain the exchange rate and current account? Journal of International Money and Finance 25 (5), 675–701.Google Scholar
Campbell, J. (1996) Understanding risk and return. Journal of Political Economy 104 (2), 298–345.CrossRefGoogle Scholar
Chetty, R., Guren, A., Manoli, D., and Weber, A. (2011a) Are micro and macro labor supply elasticities consistent? A review of evidence on the intensive and extensive margins. American Economic Review 101 (3), 471–475.CrossRefGoogle Scholar
Chetty, R., Guren, A., Manoli, D.S., and Weber, A. (2011b) Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities. NBER Working Paper 16729.Google Scholar
Coeurdacier, N. (2009) Do trade costs in goods market lead to home bias in equities? Journal of International Economics 77 (1), 86–100.Google Scholar
Coeurdacier, N. and Gourinchas, P. (2011) When Bonds Matter: Home Bias in Goods and Assets. NBER Working Paper 17560.Google Scholar
Coeurdacier, N., Kollmann, R., and Martin, P. (2007) Return Volatility and International Portfolio Choice. SSRN working paper 972158.Google Scholar
Coeurdacier, N. and Rey, H. (in press) Home bias in open economy financial macroeconomics. Journal of Economic Literature.Google Scholar
Cogley, T. and Nason, J.M. (1995) Output dynamics in real-business-cycle models. American Economic Review 85 (3), 492–511.Google Scholar
Devereux, M. and Sutherland, A. (2009) A portfolio model of capital flows to emerging markets. Journal of Development Economics 89 (2), 181–193.Google Scholar
Devereux, M. and Sutherland, A. (2011) Country portfolios in open economy macro-models. Journal of the European Economic Association 9 (2), 337–369.Google Scholar
Feenstra, R., Obstfeld, M., and Russ, K.N. (2012) In Search of the Armington Elasticity. Mimeo, UC Davis Department of Economics.Google Scholar
Gourinchas, P. and Rey, H. (2007) International financial adjustment. Journal of Political Economy 115 (4), 665–703.Google Scholar
Hansen, L.P. and Singleton, K.J. (1982) Generalized instrumental variables estimation of nonlinear rational expectations models. Econometrica 50 (5), 1269–1286.Google Scholar
Heathcote, J. and Perri, F. (2009) The International Diversification Puzzle Is Not as Bad as You Think. NBER Working Paper 13483.Google Scholar
Julliard, C. (2002) The international diversification puzzle is not worse than you think. American Economic Review 87 (1), 170–180.Google Scholar
Lewis, K. (1999) Trying to explain home bias in equities and consumption. Journal of Economic Literature 37 (2), 571–608.Google Scholar
Mehra, R. and Prescott, E.C. (1985) The equity premium: A puzzle. Journal of Monetary Economics 15 (2), 145–161.Google Scholar
Obstfeld, M. and Rogoff, K. (2000) The six major puzzles in international macroeconomics: Is there a common cause? NBER Macroeconomics Annual, 339–390.Google Scholar
Pavlova, A. and Rigobon, R. (2007) Asset prices and exchange rates. Review of Financial Studies 20 (4), 1139–1180.Google Scholar
Stockman, A. and Tesar, L. (1995) Tastes and technology in a two-country model of the business cycle: Explaining international co-movements. American Economic Review 85 (1), 168–185.Google Scholar
Van Wincoop, E. and Warnock, F. (2010) Is home bias in assets related to home bias in goods? Journal of International Money and Finance 29 (6), 1108–1123.Google Scholar
Wang, C., Wang, N., and Yang, J.Q. (2012) A unified model of entrepreneurship dynamics. Journal of Financial Economics 106 (1), 1–23.Google Scholar