Human capital and international portfolio choice

Julliard, Christian (2004) Human capital and international portfolio choice. Christian Julliard, London, UK. (Unpublished)

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Abstract

This paper shows that in a non-representative agent model in which households face short selling constraints and labor income risk, in the form of both uninsurable shocks and a common aggregate component, small differences in the correlation between aggregate labor income shocks and domestic and foreign stock market returns lead to a very large home bias in asset holdings. Calibrating this buffer-stock saving model to match both microeconomic and macroeconomic U.S. labor income data, I demonstrate that, consistent with the empirical literature, a) investors that enter the stock market will initially specialize in domestic assets, b) individual portfolios become more internationally diversified, adding foreign stocks one at a time, as the level of asset wealth increases, and c) most importantly, the implied aggregate portfolio of U.S. investors shows a large degree of home bias consistent with observed levels.

Item Type:	Monograph (Working Paper)
Additional Information:	© 2004 Christian Julliard
Library of Congress subject classification:	H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor
Journal of Economic Literature Classification System:	G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions F - International Economics > F3 - International Finance > F30 - General G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
Sets:	Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online Departments > Economics Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited:	12 May 2008 09:52
URL:	http://eprints.lse.ac.uk/4813/

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