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Human capital and international portfolio diversification: a reappraisal

Bretscher, Lorenzo, Julliard, Christian and Rosa, Carlo (2015) Human capital and international portfolio diversification: a reappraisal. SRC Discussion Paper (No 48). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

We study the implications of human capital hedging for international portfolio choice. First, we document that, at the household level, the degree of home country bias in equity holdings is increasing in the labor income to financial wealth ratio. We show that a heterogeneous agent model in which households face short selling constraints and labor income risk, calibrated to match both micro and macro labor income and asset returns data, can both rationalize this finding and generate a large aggregate home country bias in portfolio holdings. Second, we find that the empirical evidence supporting the belief that the human capital hedging motive should skew domestic portfolios toward foreign assets, is driven by an econometric misspecification rejected by the data. Third, we show that, given the high degree of international GDP correlations in the data, very small domestic redistributive shocks are sufficient to skew portfolios toward domestic assets.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.systemicrisk.ac.uk/
Additional Information: © 2015 The Authors
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HG Finance
J Political Science > JZ International relations
JEL classification: F - International Economics > F3 - International Finance > F30 - General
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 21 Jan 2016 12:41
Last Modified: 17 Apr 2019 23:03
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/65091

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