Estimates of the Relative Deviation for the Equity Home Bias

Abstract

There are a variety of explanations of equity home bias, the underlying difference being that different factors are emphasized, such as trade costs that impede international diversification, and the possibility that terms of trade responses to supply shocks provide international risk sharing. We found that with the ratio of world consumption of Home vs. Foreign goods and the ratio of world demand for Home vs. Foreign goods used for physical investment, we have three different estimates of the relative deviation about terms of trade, and then figured out three expressions representing these estimates. What we concluded helps to uncover the puzzle of the equity home bias.