DP5113 Home Bias and International Risk Sharing: Twin Puzzles Separated at Birth

Author(s): Bent E Sørensen, Yi-Tsung Wu, Oved Yosha, Yu Zhu
Publication Date: June 2005
Keyword(s): consumption smoothing, income smoothing, international portfolio diversification
JEL(s): F36
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5113

We show that international home bias in bond and equity holdings declined during the late 1990s at the same time as international risk sharing increased. Also, countries with less home bias, on average, tended to obtain more risk sharing in international markets. Using panel data estimations, we demonstrate that less home bias is associated with more international risk sharing when both cross-sectional and time-series dimensions are taken into account. This indicates that lack of risk sharing and international home bias are closely related empirical phenomena.