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Industrial specialization matters: A new angle on equity home Bias

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  • Hu, Chenyue

Abstract

This paper theoretically and empirically examines how industrial structure affects international portfolio diversification. I embed portfolio choice in a multi-country, multi-sector model in order to explore how sectoral productivity differences affect a country's risk exposure and hence influence home bias. The model predicts that investors from highly specialized economies who want to hedge their risk have a strong incentive to avoid domestic assets. I confirm the prediction with the data by finding that home bias is negatively correlated with a country's degree of industrial specialization. This finding unveils the interaction between intranational risk hedging across sectors and international risk hedging across countries.
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  • Hu, Chenyue, 2020. "Industrial specialization matters: A new angle on equity home Bias," Santa Cruz Department of Economics, Working Paper Series qt5g52d8db, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt5g52d8db
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    Citations

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    Cited by:

    1. Lambert, Claudia & Molestina Vivar, Luis & Wedow, Michael, 2024. "Is home bias biased? New evidence from the investment fund sector," Working Paper Series 2924, European Central Bank.
    2. Junyong Lee & Kyounghun Lee & Frederick Dongchuhl Oh, 2023. "Religion and Equity Home Bias," Open Economies Review, Springer, vol. 34(5), pages 1015-1038, November.
    3. Sanyal, Anirban, 2023. "Caught in the Crossfire: How Trade Policy Uncertainty Impacts Global Trade," EconStor Preprints 272825, ZBW - Leibniz Information Centre for Economics.
    4. Hu, Chenyue, 2023. "What explains equity home bias? Theory and evidence at the sector level," European Economic Review, Elsevier, vol. 160(C).
    5. Lee, Junyong & Lee, Kyounghun & Oh, Frederick Dongchuhl, 2023. "International portfolio diversification and the home bias puzzle," Research in International Business and Finance, Elsevier, vol. 64(C).
    6. Sanyal, Anirban, 2021. "Impact of US-China Trade War on Indian External Trade," EconStor Preprints 242250, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    Economics; Applied Economics; Home bias; Portfolio choice; Sectoral productivity; Industrial specialization; Applied economics; Econometrics; Economic theory;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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