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The Home Bias of the Poor: Terms of Trade Effects and and Portfolios across the Wealth Distribution
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1725-6704
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EUI ECO; 2008/28
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BROER, Tobias, The Home Bias of the Poor: Terms of Trade Effects and and Portfolios across the Wealth Distribution, EUI ECO, 2008/28 - https://hdl.handle.net/1814/9232
Abstract
Wealthier people generally hold a larger part of their savings in risky
assets. Using the US Survey of Consumer Finances, I show that wealthier
households also have a higher portfolio share of foreign assets. This relative
home bias of the poor does not seem to be explained by xed participation
costs alone, as the portfolio share of foreign assets increases with nan-
cial wealth even among participants in foreign asset markets. This paper
shows how both biases of poorer agents' portfolios, towards safe and home
assets, can arise in a simple 2 country economy with income and port-
folio heterogeneity. Poor investors are naturally biased against domestic
equity when wages and capital returns are positively correlated, making
equity a bad hedge against
uctuations in labour income relative to bonds.
Moreover poor investors prefer home to foreign bonds if equilibrium terms
of trade movements systematically lead to a fall in the purchasing power
of domestic assets in periods of high wages. I show that this is likely to
be the case if aggregate supply shocks at home are more important than
abroad. Finally, the model shows that aggregate home bias in the country
portfolio implies relative home bias of the poor and vice versa.