Volume 8, Issue 10 (October 2021), Pages: 59-76

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 Original Research Paper

 Title: Equity home bias and consumption-real exchange rate puzzles: A joint solution

 Author(s): Dao Hoang Tuan *

 Affiliation(s):

 Academy of Policy and Development (APD), International School of Economics and Finance, Hanoi, Vietnam

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 * Corresponding Author. 

  Corresponding author's ORCID profile: https://orcid.org/0000-0002-5785-3843

 Digital Object Identifier: 

 https://doi.org/10.21833/ijaas.2021.10.008

 Abstract:

In a standard dynamic stochastic general equilibrium model with a complete asset market, home agents should hold a foreign equity biased portfolio to hedge the non-traded labor income risk, which contradicts home equity biased portfolios observed worldwide. As the labor income share increases, the degree of home bias should decrease because there is more incentive to hold foreign equity. In the data, there is not any evidence that the labor income share and the degree of home bias are negatively correlated. The standard model also predicts that the consumption differential-real exchange rate correlation is positive, while it is negative in the data. I show that a combination of market incompleteness, non-tradable goods, and labor supply can explain the three features above. My model can generate a large equity home bias, despite the strong positive correlation of non-traded human capital return with domestic equity return. The home bias is not sensitive to the labor income share. The consumption differential-real exchange rate unconditional correlation generated by my model simulation is zero. 

 © 2021 The Authors. Published by IASE.

 This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

 Keywords: International equity home-bias, Consumption-real exchange rate puzzle, Home agent

 Article History: Received 19 April 2021, Received in revised form 6 July 2021, Accepted 22 July 2021

 Acknowledgment 

No Acknowledgment.

 Compliance with ethical standards

 Conflict of interest: The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

 Citation:

 Tuan DH (2021). Equity home bias and consumption-real exchange rate puzzles: A joint solution. International Journal of Advanced and Applied Sciences, 8(10): 59-76

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 Figures

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 Tables

 Table 1 Table 2   

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