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

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  • Tobias Broer

    (Stockholm University)

Abstract

This paper documents how poorer and less educated US households hold a smaller fraction of foreign assets in their financial portfolio. This average home bias of the poor is partly due to a lower probability of participating in foreign asset markets, often attributed to fixed costs of market entry. However, portfolio shares also rise with wealth among those households that do hold foreign assets, which fixed participation costs cannot explain. I use a simple, standard two-country general equilibrium model to show that hedging of terms of trade movements and non-financial income risk, commonly employed to explain aggregate country-level home bias, also produces non-trivial heterogeneity in portfolios across wealth levels within countries that is in line with the evidence.

Suggested Citation

  • Tobias Broer, 2013. "The home bias of the poor: terms of trade effects and portfolios across the wealth distribution," 2013 Meeting Papers 618, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:618
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    1. Broer, Tobias, 2017. "The home bias of the poor: Foreign asset portfolios across the wealth distribution," European Economic Review, Elsevier, vol. 92(C), pages 74-91.

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    More about this item

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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