Home bias and international capital asset pricing model with human capital

Abstract

We develop an international C.A.P.M. including human capital. We test this model and underline its contribution to the explanation of home bias observed in portfolio choice for nine countries. Human capital positively correlated with the domestic financial assets could worsen the home bias puzzle. Then, we add deadweight costs to the model. Using different levels of risk aversion, we compute the necessary costs to explain home bias. The costs obtained are too high compared to real existing costs. Human capital is an important feature in portfolio choice, but its contribution to the explanation of the home bias is very weak. Home bias is still a puzzle.