DP8811 The home bias of the poor: Terms of trade effects and portfolios across the wealth distribution

Author(s): Tobias Broer
Publication Date: February 2012
Keyword(s): Heterogeneous Agents, Home Bias, Portfolio Choice, Terms of Trade
JEL(s): D11, D31, E21, F36, G11
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8811

This paper documents how the share of foreign stocks in US household portfolios rises with the ratio of financial wealth to non-financial income. This is both because wealthier households are more likely to participate in foreign asset markets, and because portfolio shares of participants increase with financial wealth but decrease with non-financial income. A simple, standard two-country general equilibrium model shows that hedging of terms of trade movements and non-financial income risk produces non-trivial heterogeneity in portfolios across the wealth and income distribution within countries that is qualitatively in line with this evidence.