TY  - JOUR
AU  - Baxter,Marianne
AU  - Jermann,Urban J.
AU  - King,Robert G.
TI  - Nontraded Goods, Nontraded Factors, and International Non-Diversification
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5175
PY  - 1995
Y2  - July 1995
UR  - http://www.nber.org/papers/w5175
L1  - http://www.nber.org/papers/w5175.pdf
N1  - Author contact info:
Marianne Baxter
Department of Economics
Boston University
270 Bay State Road
Boston, MA  02215
Tel: 617/353-2417
Fax: 617/353-4449
E-Mail: mbaxter@bu.edu

Urban Jermann
Finance Department
Wharton School of the University of Pennsylvania
3620 Locust Walk
Philadelphia, PA  19104
Tel: 215/898-4184
Fax: 215/898-6200
E-Mail: jermann@wharton.upenn.edu

Robert King
Department of Economics
Boston University
270 Bay State Road
Boston, MA  02215
Tel: 617/353-5941
E-Mail: rking@bu.edu
AB  - Can the presence of nontraded consumption goods explain the high degree of 'home bias' displayed by investor portfolios?  We find that the answer is no, so long as individuals have access to free international trade in financial assets.  In particular, it is never optimal to exhibit home bias with respect to domestic traded-good equities.  By contrast, an optimal portfolio may exhibit substantial home bias with respect to nontraded-good equities, although this result requires a very low degree of substitution between traded and nontraded goods in the utility function.  Further, our analysis uncovers a second puzzle: the composition of investors' portfolios appears to be strongly at variance with the predictions of the model that incorporates nontraded goods.
ER  -