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The Home Bias in Equities and Distribution Costs
Author(s) -
Harms Philipp,
Hoffmann Mathias,
Ortseifer Christina
Publication year - 2015
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12105
Subject(s) - economics , portfolio , equity (law) , hedge , incentive , distribution (mathematics) , replicate , general equilibrium theory , portfolio investment , financial economics , econometrics , monetary economics , microeconomics , ecology , mathematical analysis , statistics , mathematics , political science , law , biology
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.