Taking Home Bias Seriously: Absolute and Relative Measures Explaining Consumption Risk-Sharing

Recent empirical work shows that ongoing international financial integration facilitatescross-country consumption risk sharing. While these studies employ absolute measures toaccount for a country''s integration in international capital markets, we devise a relativemeasure that captures the geographical composition of a country''s international portfolioinvestments. Using panel-data regression for a group of OECD countries during the financialglobalization period 1980-2005, we show that the geography of international portfolios helps to explain the degree of consumption risk-sharing obtained.