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Preprints, Working Papers, ... Year : 2015

When Bonds Matter: Home Bias in Goods and Assets

Abstract

This paper presents a model of international portfolios with real exchange rate and non financial risks that accounts for observed levels of equity home bias. A key feature is that investors can trade domestic and foreign bonds in addition to equities. Bonds matter: in equilibrium, investors structure their bond portfolio to hedge real exchange rate risks and equity home bias arises when non-financial income risk is negatively correlated with equity returns, after controlling for bond returns. Our framework allows us to derive equilibrium bond and equity portfolios in terms of sufficient statistics - directly measurable hedge ratios. We estimate equity and bond portfolios implied by the model for G-7 countries an find strong empirical support for the theory. We are able to account for a significant share of the equity home bias and obtain a currency exposure of bond portfolios comparable to the data.
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hal-03470191 , version 1 (08-12-2021)

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Nicolas Coeurdacier, Pierre-Olivier Gourinchas. When Bonds Matter: Home Bias in Goods and Assets. 2015. ⟨hal-03470191⟩
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