Endogenous Home Bias in Portfolio Diversification and Firms’ Entry |
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| Authors: | Marta Arespa |
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| Institution: | Departament de Teoria Econòmica, Universitat de Barcelona, Barcelona, Spain Also affiliated to Centre de Recerca en Economia del Benestar (CREB). The author thanks G. Corsetti for his invaluable guidance and S. Krautheim, J. Caballé, F. Gouret and the referees for their useful comments and suggestions during the completion of this paper. Thanks are also due to the participants in SMYE 2007 and RES 2008 for dynamic discussions on earlier drafts of the paper. Any remaining errors are those of the author. The financial support from the Spanish Ministry of Science and Innovation through grant ECO2012‐34046 is gratefully acknowledged. |
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| Abstract: | The home bias in portfolios is considered a main puzzle in international macroeconomics. This paper provides a new benchmark for its analysis in a tractable new open economy macroeconomic model, where the home‐biased position is an optimal allocation. An equilibrium model of perfect risk‐sharing is specified, with endogenous portfolios and firm entry. Unlike in previous work, the international portfolio diversification is driven by home bias in capital goods—independently of home bias in consumption when countries are of equal size. The model explains the recent patterns of portfolio allocations in developed economies. Most important, optimal portfolio shares are independent of market dynamics. |
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