International Portfolios with Supply, Demand and Redistributive Shocks
London Business School
ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)
Université Paris I Panthéon-Sorbonne - Centre Maison des Sciences Economiques
CEPR Discussion Paper No. DP6482
This paper explains three key stylized facts observed in industrialized countries: 1) portfolio holdings are biased towards local equity; 2) international portfolios are long in foreign currency assets and short in domestic currency; 3) the depreciation of a country's exchange rate is associated with a net external capital gain, i.e. with a positive wealth transfer from the rest of the world. We present a two-country, two-good model with trade in stocks and bonds, and three types of disturbances: shocks to endowments, to the relative demand for home vs. foreign goods, and to the distribution of income between labour and capital. With these shocks, optimal international portfolios are shown to be consistent with the stylized facts.
Number of Pages in PDF File: 37
Keywords: Equity home bias, International portfolios, International risk sharing, Valuation effects
JEL Classification: F30, F41, G11working papers series
Date posted: June 2, 2008
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