Working Paper: NBER ID: w13612
Authors: Fabrice Collard; Harris Dellas; Behzad Diba; Alan Stockman
Abstract: We show that international trade in goods is the main determinant of international equity portfolios and offers a compelling -- theoretically and empirically -- resolution of the portfolio home bias puzzle. The model implies that investors can achieve full international risk diversification if the share of wealth invested in foreign equity matches their country's degree of openness (the imports to GDP share). The empirical evidence strongly supports this implication.
Keywords: International trade; Equity portfolios; Home bias
JEL Codes: F21; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international trade in goods (F10) | international equity portfolios (G15) |
| imports-to-GDP ratio (F10) | share of foreign equity holdings (F23) |
| share of foreign equity holdings (F23) | portfolio home bias (G11) |
| true imports share adjusted for foreign value added < 50% (F14) | home bias observed in international equity portfolios (G15) |
| deviations from utility separability and symmetry in traded goods consumption (D11) | portfolio home bias (G11) |