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On the currency effect to home bias puzzle

Author

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  • Mao-Wei Hung
  • Mei-Lan Lo
  • Hsiao-Yuan Yu

Abstract

We propose an international asset allocation model to investigate whether home currency concern has impacts on home bias puzzle. Domestic investors choosing their international portfolios depend on home currency premium and thus will behave in home bias scenarios. Besides, the optimal portfolio suggests that it is isolated with nontradable and tradable consumptions. After employing the market-clearing condition, we price the equilibrium exchange rate and it tells that Interest Rate Parity (IRP) has more potential influence than Purchasing Power Parity (PPP) on exchange rate pricing in our model.

Suggested Citation

  • Mao-Wei Hung & Mei-Lan Lo & Hsiao-Yuan Yu, 2010. "On the currency effect to home bias puzzle," Applied Economics Letters, Taylor & Francis Journals, vol. 17(8), pages 815-822.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:8:p:815-822
    DOI: 10.1080/17446540802481839
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    References listed on IDEAS

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    1. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
    2. Baxter, Marianne & Jermann, Urban J. & King, Robert G., 1998. "Nontraded goods, nontraded factors, and international non-diversification," Journal of International Economics, Elsevier, vol. 44(2), pages 211-229, April.
    3. Leonid Kogan & Raman Uppal, "undated". "Risk Aversion and Optimal Portfolio Policies in Partial and General Equilibrium Economies," Rodney L. White Center for Financial Research Working Papers 13-00, Wharton School Rodney L. White Center for Financial Research.
    4. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    5. Roger White, 2007. "Immigrant-trade links, transplanted home bias and network effects," Applied Economics, Taylor & Francis Journals, vol. 39(7), pages 839-852.
    6. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October.
    7. Pesenti, Paolo & van Wincoop, Eric, 2002. "Can Nontradables Generate Substantial Home Bias?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 25-50, February.
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