NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Do Nontraded Goods Explain the Home Bias Puzzle?

Paolo Pesenti, Eric van Wincoop

NBER Working Paper No. 5784
Issued in October 1996
NBER Program(s):   IFM

Interpretations of the home bias puzzle in international finance have fre- quently focused on the role of fluctuations in domestic nontraded output, through their effects on the marginal utility of tradables consumption. This paper assesses the empirical evidence of this aproach, by deriving an explicit solution for the optimal international portfolio and applying the model to a set of fourteen OECD countries. Computing asset returns according to a `fundamentals' approach, it is possible to account for an average gap of no more than 10-15 percantage points between estimated domestic ownership shares and domestic shares under full diversification. When stock-market data are directly used, the predicted coefficient of home bias shrinks to 3%.

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Document Object Identifier (DOI): 10.3386/w5784

Published: as "Can Nontradables Generate Substantial Home Bias?" Journal of Money, Credit and Banking, Volume: 34 Issue: 1 (February 2002) Pages: 25-50

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