International Portfolios, Capital Accumulation and Foreign Assets Dynamics

60 Pages Posted: 8 Jun 2016

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 3 versions of this paper

Date Written: 2008

Abstract

Despite the liberalisation of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanation of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation, shocks to the efficiency of physical investment, as well as international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuation in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows.

Keywords: capital accumulation, international equity and bond portfolios, capital flows, current account, valuation effects, terms of trade

JEL Classification: G1, F3, F2

Suggested Citation

Coeurdacier, Nicolas and Kollmann, Robert and Martin, Philippe, International Portfolios, Capital Accumulation and Foreign Assets Dynamics (2008). Bundesbank Series 1 Discussion Paper No. 2008,19. Available at SSRN: https://ssrn.com/abstract=2785314

Nicolas Coeurdacier (Contact Author)

London Business School ( email )

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

Robert Kollmann

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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