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The International Diversi fi cation Puzzle is not Worse Than You Think ∗
| Content Provider | Semantic Scholar |
|---|---|
| Author | Julliard, Christian Rosa, Carlo |
| Copyright Year | 2002 |
| Abstract | We study the implications of human capital hedging for international portfolio diversification. First, we show that given the degree of international economic integration observed in the data, very small domestic redistributive shocks can lead to home country bias in portfolio holdings. Second, we find that the seminal empirical result of Baxter and Jermann (1997) — that the international diversification puzzle is worsened if we consider the human capital hedging motive — is driven by an econometric misspecification that restricts the countries considered in their study to be economically not integrated. Moreover, once this misspecification is corrected, considering the human capital risk does not unequivocally worsen the puzzle, and in some cases helps explaining it. Third, we document that the substantial statistical uncertainty on measuring returns to the aggregate capital stock can rationalize the disagreements in the previous literature. Fourth, we find sharp evidence that if the set of assets that can be used to hedge aggregate human capital is restricted to publicly traded stocks, the human capital hedging motive has a negligible impact on optimal portfolio choice. This last finding is driven by the extremely small correlation between stock market returns and returns to human capital. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=FEMES09&paper_id=446 |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
