Home Bias in Asset Holdings and Home bias in Consumption

By employing a pooled EGLS on the panel data of the US and 63 US foreign trading counterparts from 1997 through 2013, we tested both ① on the linkage between the US imports and the US foreign investments from and in each of 63 US foreign trading counterparts to investigate whether risk-averse households of a given country would hold asset compositions resembling their consumption compositions to hedge international consumption risk as Krugman (1981) argued, and ② on the impact of the increase in trade openness on the aforementioned linkage to examine whether economic integration weakens the stylized fact of asset home bias. Not only in the benchmark case but also in the experiments with 5 different groupings of 63 US foreign trading counterparts by ① OECD member countries, ② industrial and developing countries, ③ income levels by GNI, ④ the degree of trade openness, and ⑤ exchange rate regimes, we found the positive and statistically significant linkage between the US imports and the US foreign investments, and the negative and statistically significant impact of the increase in trade openness on the linkage. We conclude that international capital mobility would be constrained by risk-averse investors’ international consumption risk hedging motive, even if world capital markets would be perfect and have no barriers in terms of transaction costs including taxes, restrictions, asymmetric information, and so on. In addition, this constraint by risk-averse investors’ international consumption risk hedging behaviors on international capital mobility would become relaxed as risk-averse investors’ consumption patterns become integrated through the increase in trade openness.