Abstract
Standard theory would predict that investors hold a well diversified portfolio of equities across the world but despite the process of `financial globalization,' investors still hold a disproportionate share of local equities in their portfolio: the `equity home bias.’ Their consumption basket is also tilted toward domestic goods: the `consumption home bias.’ In the data, these two biases are positively correlated across countries. We review the different theories that can explain this pattern of the data: hedging motives in portfolio decisions and frictions in international financial markets.
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