Home Bias

We show that the composition of imports has important implications for the optimal volatility of the exchange rate. Using input-output data for 25 countries we document substantial differences in the import and non-tradable content of final demand components, and in the role played by imported inputs in domestic production. We build a business cycle model of a small open economy to discuss how the problem of the optimizing policy-maker changes endogenously as the composition of imports and of final demand is altered. Contrary to models where steady state trade openness is entirely characterized by home bias, we find that trade openness is a very poor proxy of the welfare impact of alternative monetary policies. Finally, we quantify the loss from an exchange rate peg relative to the Ramsey policy conditional on the composition of imports, using parameter values that are estimated from OECD input-output tables data. We find that the main determinant of the losses is the share of non-traded goods in final demand. JEL Classification: E52, E31, F02, F41.

In this paper we estimate several speciflcations of a two-country new open econ- omy macroeconomics (NOEM) model with the objective of analyzing the dynamics of the euro-dollar real exchange rate. The model features home bias, nontradable goods and incomplete international flnancial markets; we estimate versions of it with and without international price discrimination, with and without a distribution sector (intensive in local nontradable goods), with and without nominal rigidities. Nominal rigidities, either in the form of LCP or PCP, turn out to be crucial to flt the data and, in particular, the high volatility of the real exchange rate; the PCP model achieves this result with an unrealistic degree of home bias. The exchange rate pass-through is estimated to be low at the border and at the consumer level and all the frictions introduced in the complete model - local currency pricing, distribution services and home bias - are empirically important. The variance decomposition of th...

This paper empirically analyzes the importance of various features introduced in models belonging to the new open economy macroeconomics (NOEM) literature in reproducing the main stylised facts of the real exchange rate and accounting for its dynamics. Difierent models are estimated using euro-area and US data. First, the data support the model featuring incomplete pass-through due to a combination of

Increasingly, grocery stores are marketing foods differentiated as locally produced. Freshness and taste are obvious reasons for consumer preference for these goods, but also important may be home-bias. Whatever the motive, there is substantial evidence that some consumers are willing to pay premium prices for food characterized as locally produced. A customer-intercept survey and a choice experiment of food shoppers

Myopic loss aversion has been used to explain why a high equity premium might be consistent with plausible levels of risk aversion. The intuition is that it plays the role of high risk aversion in portfolio choice. But if so, should these agents not perceive larger gains from international diversification than standard preference agents with realistic levels of risk aversion? They might not because stock market returns are asymmetrically correlated. We analyze the portfolio problem of a myopic loss averse investor who has to choose between home and foreign equities in the presence of asymmetrically correlated returns. Perhaps surprisingly, depending on the horizon, this investor behaves similarly to one with standard preferences in the context of the home bias puzzle

We construct experimental economies for the purpose of studying market equilibration. The economies are the most complex laboratory economies studied to date and are “international” in economic structure. The economies have twenty-one markets and due to the fact that they have on the order of 50 agents, the economies are characterized by several hundred equations. In spite of the complexity and interdependence of the economy, the results demonstrate the substantial power of the general equilibrium model of perfect competition to predict directions of movements of market-level variables. Exploratory analysis yields patterns frequently found in field studies. For example, international trade patterns conform closely to the gravity model and exhibit a strong home bias.

An experiment examined how the type and presentation format of information about investment options affected investors' expectations about asset risk, returns, and volatility and how these expectations related to asset choice. Respondents were provided with the names of 16 domestic and foreign investment options, with 10-year historical return information for these options, or with both. Historical returns were presented either as a bar graph of returns per year or as a continuous density distribution. Provision of asset names allowed for the investigation of the mechanisms underlying the home bias in investment choice and other asset familiarity effects. Respondents provided their expectations of future returns, volatility, and expected risk, and indicated the options they would choose to invest in. Expected returns closely resembled historical expected values. Risk and volatility perceptions both varied significantly as a function of the type and format of information, but in different ways. Expected returns and perceived risk, not predicted volatility, predicted portfolio decisions.

This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong performance owed to trading expertise or longer-term allocation expertise. The evidence is overwhelmingly against trading expertise. While

The paper builds a two-country model of a monetary union with home bias and price stickiness. Incompleteness of financial asset markets is allowed. In this environment, we derive the solution for optimal behavior by the monetary policymaker and show that welfare can be higher under incomplete markets than under complete markets. The argument is a second-best one. In a monetary

This paper assesses the sophistication of pension funds' investment policies using data on 748 Dutch pension funds during the 1999–2006 period. We develop three indicators of sophistication: gross rounding of investment choices, investments in alternative sophisticated asset classes and ‘home bias'. We find that pension funds' strategic portfolio choices are often based on coarse and possibly less sophisticated approaches. Most

This paper uses bayesian techniques to estimate a small-scale two country model based on the Euro Area and the U.S. data. The model, based on the New Open Economy Macroeconomics framework, is microfounded and characterized by nominal price rigidities, a nontradable sector, home bias in consumption and incomplete financial markets at international level. Two versions of the model are estimated:

This paper analyses referee home bias due to social pressure with data from the matches played in the First Division of the Spanish football league between the 2002/03 and 2009/10 seasons. Finally, our main conclusion is that the time the referee has to make a decision does affect the final outcome; while there is no referee home bias when a free kick is awarded, in the case of booking players, when the referee has more time to make a decision, social pressure can influence the final outcome in favour of the home team.

This paper investigates to what extent ongoing integration has eroded the equity home bias. To measure home bias, we compare observed foreign asset holdings of a set of 25 developed markets with optimal weights obtained from 5 benchmark models. Under the assumptions of the classical model in home bias studies, the International CAPM (I-CAPM), optimal portfolio weights are given by the relative world market capitalization shares. Four alternative models that allow for various degrees of mistrust in the I-CAPM and involve returns data in computing optimal portfolio weights, generally indicate a substantially lower yet still positive home bias. We observe a reduction in the home bias for many countries at the end of the 1990s and link the sharp decrease in the equity home bias to time-varying globalization and regional integration.

This paper revisits an old argument, hedging real exchange rate risk, as an explanation of the international home bias in equity. In a dynamic model, the relevant risk to be hedged is the long-run risk as opposed to the short-run risk. Domestic equity is indeed a good hedge with respect to long-run real-exchange-rate risk. Two new frameworks are able to explain a large share of the observed US home bias: a model with Hansen-Sargent preferences in which agents fear model misspecification and a model with Epstein-Zin preferences. These two models are also immune to the risk-free rate puzzle. (JEL C58, F31, G11, G15)

Globalization has been a persistent phenomenon of the post-war period. The gross volume of cross-border capital flows has grown at an average of 25 percent a year, and trade in goods and services has also increased, albeit not as dramatically, but at least twice as fast as world GDP over the past 20 years. Yet, consumers and investors continue to