International Portfolios and Current Account Dynamics: The Role of Capital Accumulation

35 Pages Posted: 17 Mar 2008

See all articles by Nicolas Coeurdacier

Nicolas Coeurdacier

London Business School

Robert Kollmann

ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: February 26, 2008

Abstract

Despite the liberalization of capital flows among OECD countries, equity home bias remains sizable, but is now less severe than in earlier decades; as a result, fluctuations in returns on foreign assets have a substantial effect on countries' wealth. As documented in this paper, changes in net foreign asset positions (NFA) are highly volatile, serially uncorrelated and countercyclical. We show that a two-country RBC model with productive investment and unrestricted international trade in stocks and bonds can explain these facts. Capital accumulation and shocks to the efficiency of investment are key ingredients for the success of the model. In contrast to related models that abstract from capital, equity home bias is not sensitive to preference parameters. In the model, NFA changes are largely driven by capital gains/losses due to movements in equity prices. The model thus matches the high volatility and low serial correlation of NFA changes. We compare settings with complete and incomplete financial markets. Imperfect hedging is required to generate a realistic conventional current account measure that solely reflects aggregate net flows of assets between countries.

Keywords: international equity and bond portfolios, capital flows, current account, capital accumulation, news shocks, valuation effects

JEL Classification: G1, G15, G11

Suggested Citation

Coeurdacier, Nicolas and Kollmann, Robert, International Portfolios and Current Account Dynamics: The Role of Capital Accumulation (February 26, 2008). Available at SSRN: https://ssrn.com/abstract=1106280 or http://dx.doi.org/10.2139/ssrn.1106280

Nicolas Coeurdacier

London Business School ( email )

Sussex Place
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London, London NW1 4SA
United Kingdom

Robert Kollmann (Contact Author)

ECARES, Université Libre de Bruxelles ( email )

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Brussels, B-1050
Belgium

University of Paris XII - Department of Economics ( email )

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Creteil cedex, 94010
France

HOME PAGE: http://www.robertkollmann.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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