International Portfolios with Supply, Demand and Redistributive Shocks

37 Pages Posted: 2 Jun 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)

Philippe Martin

Université Paris I Panthéon-Sorbonne - Centre Maison des Sciences Economiques

Multiple version iconThere are 2 versions of this paper

Date Written: September 2007

Abstract

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.

Keywords: Equity home bias, International portfolios, International risk sharing, Valuation effects

JEL Classification: F30, F41, G11

Suggested Citation

Coeurdacier, Nicolas and Kollmann, Robert and Martin, Philippe, International Portfolios with Supply, Demand and Redistributive Shocks (September 2007). CEPR Discussion Paper No. DP6482. Available at SSRN: https://ssrn.com/abstract=1138946

Nicolas Coeurdacier

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Robert Kollmann (Contact Author)

ECARES, Université Libre de Bruxelles ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

University of Paris XII - Department of Economics ( email )

61 avenue du General de Gaulle
Creteil cedex, 94010
France

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Philippe Martin

Université Paris I Panthéon-Sorbonne - Centre Maison des Sciences Economiques ( email )

106/112 boulevard de l'Hopital
Paris Cedex 13, 75647
France

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