International Portfolios with Supply, Demand and Redistributive Shocks
35 Pages Posted: 17 Mar 2008
Date Written: March 2008
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 labor and capital. With these shocks, optimal international portfolios are shown to be consistent with the stylized facts.
Keywords: international portfolios, home bias, supply shocks, demand shocks, redistributive shocks, valuation effects
JEL Classification: G11, G15
Suggested Citation: Suggested Citation