Asset home bias in debtor and creditor countries

Zhang, N. (2023) Asset home bias in debtor and creditor countries. Journal of Economic Dynamics and Control, (doi: 10.1016/j.jedc.2023.104760) (In Press)

Abstract

Why do debtor countries have on average a less diversified international portfolio than creditor countries? With two symmetric countries, the existing literature has showed why portfolios are home-biased to the same degree across countries. We show that, in a model with debtor and creditor countries, a new hedging motive of net external positions implies a short (long) position of both home and foreign assets in the debtor (creditor) country. Marginally, the debtor (creditor) country loses (gains) the net foreign asset (NFA) as a diversified portfolio on top of the above symmetrically biased portfolio, which intensifies (dilutes) the home bias there. An extended model with both equity and bond assets also yield global two-way capital flows that are in consistent with the data. The theory helps understand the financial capital flows between the debtor developing and creditor developed countries during the financial globalization from 1990s, and receives empirical support.

• Item Type: Articles
• Additional Information: Financial support from the ESRC, Grant No. ES/I024174/1, and University of Glasgow is gratefully acknowledged.
• Status: In Press
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Zhang, Ning
• Authors: Zhang, N.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Journal of Economic Dynamics and Control
• Publisher: Elsevier
• ISSN: 0165-1889
• ISSN (Online): 1879-1743
• Published Online: 11 October 2023
• Copyright Holders: Copyright © 2023 The Author
• First Published: First published in Journal of Economic Dynamics and Control 2023
• Publisher Policy: Reproduced under a Creative Commons License