NONTRADED GOODS, NONTRADED FACTORS, AND INTERNATIONAL NON-DIVERSIFICATION

Can the presence of nontraded consumption goods or nontraded factors o f production explain the high degree of ''home bias'' displayed by inv estor portfolios? We find that the answer is no, so long as individual s have access to free international trade in financial assets. In part icular, it is never optimal to exhibit home bias with respect to domes tic traded-good equities, By contrast, holdings of nontraded-good equi ties in an optimal portfolio will depend sensitively on the elasticity of substitution between traded and nontraded goods. (C) 1998 Elsevier Science B.V.