Working Paper: CEPR ID: DP8811
Authors: Tobias Broer
Abstract: This paper documents how the share of foreign stocks in US household portfolios rises with the ratio of financial wealth to non-financial income. This is both because wealthier households are more likely to participate in foreign asset markets, and because portfolio shares of participants increase with financial wealth but decrease with non-financial income. A simple, standard two-country general equilibrium model shows that hedging of terms of trade movements and non-financial income risk produces non-trivial heterogeneity in portfolios across the wealth and income distribution within countries that is qualitatively in line with this evidence.
Keywords: Heterogeneous Agents; Home Bias; Portfolio Choice; Terms of Trade
JEL Codes: D11; D31; E21; F36; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial wealth (G51) | portfolio shares of foreign stocks (G15) |
| nonfinancial income (H24) | portfolio shares of foreign stocks (G15) |
| financial wealth (G51) | probability of participation in foreign asset markets (G15) |
| terms of trade movements (F14) | portfolio decisions (G11) |
| home productivity (D13) | prices for home goods (L68) |
| financial wealth (G51) | diversified portfolio including foreign equities (G15) |
| lower financial wealth (G51) | holding home bonds (H74) |