What Explains Equity Home Bias? Theory and Evidence at the Sector Level

Download or read book What Explains Equity Home Bias? Theory and Evidence at the Sector Level written by Chenyue Hu and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the well-known equity home bias puzzle in international macroeconomics by exploiting the cross-sector variation. Combining unique financial datasets, I introduce a novel sectoral home bias index that covers 27 industries in 43 countries, which enables empirical and theoretical analysis of the puzzle in unprecedented detail. I uncover two stylized facts (1) sectoral home bias is stronger for nontradable sectors and in countries with a higher degree of capital restrictions, and (2) investors tilt portfolios more towards domestic assets for the sectors in which their countries reveal a comparative advantage. Motivated by these findings, I build a multi-sector model that incorporates transaction costs, information asymmetry, and risk-hedging motives in investors' portfolio choice. Moreover, I quantify the effects of these frictions on both sector- and country-level home bias in a calibrated DSGE model. This framework sheds light on the patterns and determinants of international financial investment.