The Home Bias in Equities and Distribution Costs |
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| Authors: | Philipp Harms Mathias Hoffmann Christina Ortseifer |
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| Affiliation: | 1. Johannes Gutenberg University Mainz, DE‐55128 Mainz, GermanyAlso affiliated to the Study Center Gerzensee.;2. Deutsche Bundesbank, DE‐60431, Germany;3. Johannes Gutenberg University Mainz, DE‐55128 Mainz, Germany |
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| Abstract: | We show that incorporating distribution costs into a general equilibrium model of international portfolio choice helps to explain the home bias in international equity investment. Our model is able to replicate observed investment positions for a wide range of parameter values, even if agents have an incentive to hedge labor income risk by purchasing foreign equity. This is because the existence of a retail sector affects both the correlation of domestic returns with the domestic price level and the correlation between financial and non‐financial income. |
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| Keywords: | Home bias international financial market integration international risk sharing JEL classification: F41 G11 G15 |
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