Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium

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ID: 307209
1994
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Abstract
We test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk. The empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation. We then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs. Using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion. For a level of risk aversion consistent with standard estimates of the domestic equity market risk premium, these costs are about a few percent per annum, greater than observable costs such as withholding taxes. Thus, the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion.
Reference Key
openalex_W2047260288 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Ian A. Cooper, Evi Kaplanis
Journal review of financial studies
Year 1994
DOI
10.1093/rfs/7.1.45
URL
https://doi.org/10.1093/rfs/7.1.45
Keywords Keywords not found

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