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TASTE SHOCKS, ENDOGENOUS LABOR SUPPLY, AND EQUITY HOME BIAS

Published online by Cambridge University Press:  03 April 2013

Ling Feng
Ling Feng*
Affiliation:
School of Finance, Shanghai University of Finance and Economics
*
Address correspondence to: Ling Feng, School of Finance, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai 200433, China; e-mail: [email protected].
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Abstract

The puzzling bias of equity portfolios toward domestic assets (equity home bias) remains substantial. This paper proposes a dynamic stochastic general equilibrium model and demonstrates that shocks to consumption tastes (taste shocks) are an effective explanation for the equity home bias puzzle. In the model, home assets provide insurance for home agents to hedge against domestic taste fluctuations, whereas such insurance cannot be offered by foreign assets. The empirical evidence shows that, in explaining equity home bias, hedging against consumption taste risks is more relevant than hedging against labor income risks or real exchange rate risks.

Keywords

Equity Home BiasTaste ShocksEndogenous Labor Supply
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 7 , October 2014 , pp. 1466 - 1487
Copyright
Copyright © Cambridge University Press 2013 

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