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Human capital and international portfolio choice

Author

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  • Julliard, Christian
Abstract
This paper shows that in a non-representative agent model in which households face short selling constraints and labor income risk, in the form of both uninsurable shocks and a common aggregate component, small differences in the correlation between aggregate labor income shocks and domestic and foreign stock market returns lead to a very large home bias in asset holdings. Calibrating this buffer-stock saving model to match both microeconomic and macroeconomic U.S. labor income data, I demonstrate that, consistent with the empirical literature, a) investors that enter the stock market will initially specialize in domestic assets, b) individual portfolios become more internationally diversified, adding foreign stocks one at a time, as the level of asset wealth increases, and c) most importantly, the implied aggregate portfolio of U.S. investors shows a large degree of home bias consistent with observed levels.

Suggested Citation

  • Julliard, Christian, 2004. "Human capital and international portfolio choice," LSE Research Online Documents on Economics 4813, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:4813
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    File URL: http://eprints.lse.ac.uk/4813/
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    References listed on IDEAS

    as
    1. Jonathan Heathcote & Fabrizio Perri, 2013. "The International Diversification Puzzle Is Not as Bad as You Think," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1108-1159.
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    21. Jonathan A. Parker, 2000. "Spendthrift in America? On Two Decades of Decline in the US Saving Rate," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 317-387, National Bureau of Economic Research, Inc.
    22. Eldor, Rafael & Pines, David & Schwartz, Abba, 1988. "Home asset preference and productivity shocks," Journal of International Economics, Elsevier, vol. 25(1-2), pages 165-176, August.
    23. Michaelides, Alexander, 2003. "International portfolio choice, liquidity constraints and the home equity bias puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 555-594, December.
    24. Bottazzi, Laura & Pesenti, Paolo & van Wincoop, Eric, 1996. "Wages, profits and the international portfolio puzzle," European Economic Review, Elsevier, vol. 40(2), pages 219-254, February.
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    27. Palacios-Huerta, Ignacio, 2001. "The human capital of stockholders and the international diversification puzzle," Journal of International Economics, Elsevier, vol. 54(2), pages 309-331, August.
    28. Pesenti, Paolo & van Wincoop, Eric, 2002. "Can Nontradables Generate Substantial Home Bias?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 25-50, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Jonathan Heathcote & Fabrizio Perri, 2013. "The International Diversification Puzzle Is Not as Bad as You Think," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1108-1159.
    2. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
    3. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2009. "International Portfolios with Supply, Demand, and Redistributive Shocks," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 231-263, National Bureau of Economic Research, Inc.
    4. Fugazza, Carolina & Giofré, Maela & Nicodano, Giovanna, 2011. "International diversification and industry-related labor income risk," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 764-783, October.
    5. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g7084aa4m is not listed on IDEAS
    6. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
    7. Mr. Akito Matsumoto & Mr. Charles Engel, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 2005/165, International Monetary Fund.
    8. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g7084aa4m is not listed on IDEAS
    9. Barbara Pfeffer, 2006. "Trade Policy and Risk Diversification," Volkswirtschaftliche Diskussionsbeiträge 126-06, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    10. Stewen, Iryna, 2014. "Is Real Exchange Rate Hedging Motive Still Important in Determining Equity Home Bias?," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100571, Verein für Socialpolitik / German Economic Association.
    11. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
    12. van Wincoop, Eric & Warnock, Francis E., 2010. "Can trade costs in goods explain home bias in assets?," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1108-1123, October.
    13. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g7084aa4m is not listed on IDEAS

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    More about this item

    Keywords

    Home Bias; International Diversification; Human Capital; Labor Income Risk; Buffer-Stock Saving; Optimal Portfolio Choice;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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