When bonds matter
Subtitle: home bias in goods and assets
By: Nicolas Coeurdacier, Pierre-Olivier Gourinchas
Contributors: Gourinchas, Pierre-Olivier; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17560; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17560.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "This paper presents a model of international portfolios with real exchange rate and non financial risks that accounts for observed levels of equity home bias.  A key feature is that investors can trade equities as well as domestic and foreign real bonds.  Bonds matter: in equilibrium, investors structure their bond portfolio to hedge real exchange rate risk since relative bond returns are strongly correlated with real exchange rate movements.  Equity home bias does not arise from the co-movements between relative stock returns and real exchange rates, but from the hedging properties of stock returns against other sources of risk, conditionally on bond returns.  We estimate the optimal equity and bond portfolios implied by the model for G-7 countries and find strong empirical support for the theory.  We are able to account for a significant share of the equity home bias and obtain a currency exposure of bond portfolios comparable to the data"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 1/10/2012.

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