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International Capital Markets with Time-Varying Preferences

69 Pages Posted: 4 Aug 2017  

Giuliano Curatola

Goethe University Frankfurt - Research Center SAFE

Ilya Dergunov

Goethe University Frankfurt - Research Center SAFE; Goethe University Frankfurt

Date Written: August 2, 2017

Abstract

We propose a 2-country asset-pricing model where agents' preferences change endogenously as a function of the popularity of internationally traded goods. We determine the effect of the time-variation of preferences on equity markets, consumption and portfolio choices. When agents are more sensitive to the popularity of domestic consumption goods, the local stock market reacts more strongly to the preferences of local agents than to the preferences of foreign agents. Therefore, home bias arises because home-country stock represents a better investment opportunity for hedging against future fluctuations in preferences. We test our model and find that preference evolution is a plausible driver of key macroeconomic variables and stock returns.

Keywords: Asset pricing, general equilibrium, heterogeneous agents, interdependent preferences, portfolio choice

JEL Classification: D51, D52, D53, E20, E21, F21, G11, G12

Suggested Citation

Curatola, Giuliano and Dergunov, Ilya, International Capital Markets with Time-Varying Preferences (August 2, 2017). SAFE Working Paper No. 176. Available at SSRN: https://ssrn.com/abstract=3013062

Giuliano Curatola (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Ilya Dergunov

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+496979830033 (Phone)

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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