Home bias and international risk sharing: Twin puzzles separated at birth

We document that international home bias in debt and equity holdings declined during the period 1993-2003 at the same time as international risk sharing increased. Using panel-data regressions for OECD countries, we demonstrate that less home bias is associated with more international risk sharing. More generally, we show that more financial integration is associated with more risk sharing when we measure financial integration as the ratio of foreign assets to Gross Domestic Product. Our results indicate that risk sharing and international financial integration are closely related empirical phenomena.