Asset Liquidity and International Portfolio Choice

49 Pages Posted: 29 Aug 2011 Last revised: 11 May 2022

See all articles by Athanasios Geromichalos

Athanasios Geromichalos

University of California

Ina Simonovska

University of California - Davis; National Bureau of Economic Research (NBER)

Date Written: August 2011

Abstract

We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relatively more domestic assets. Consequently, agents have larger claims to domestic over foreign consumption. Moreover, foreign assets turn over faster than domestic assets because the former have desirable liquidity properties, but represent inferior saving tools. Our mechanism offers an answer to a long-standing puzzle in international finance: a positive relationship between consumption and asset home bias coupled with higher turnover rates of foreign over domestic assets.

Suggested Citation

Geromichalos, Athanasios and Simonovska, Ina, Asset Liquidity and International Portfolio Choice (August 2011). NBER Working Paper No. w17331, Available at SSRN: https://ssrn.com/abstract=1918661

Athanasios Geromichalos (Contact Author)

University of California ( email )

Ina Simonovska

University of California - Davis ( email )

1 Shields Ave
Davis, CA 95616
United States

HOME PAGE: http://inasimonovska.weebly.com/

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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