International Portfolio Allocation under Model Uncertainty
AbstractThis paper revisits an old argument, hedging real exchange rate risk, as an explanation of the international home bias in equity. In a dynamic model, the relevant risk to be hedged is the long-run risk as opposed to the short-run risk. Domestic equity is indeed a good hedge with respect to long-run real-exchange-rate risk. Two new frameworks are able to explain a large share of the observed US home bias: a model with Hansen-Sargent preferences in which agents fear model misspecification and a model with Epstein-Zin preferences. These two models are also immune to the risk-free rate puzzle. (JEL C58, F31, G11, G15)
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Journal: Macroeconomics.
Volume (Year): 4 (2012)
Issue (Month): 1 (January)
Other versions of this item:
- Pierpaolo Benigno & Salvatore Nisticò, 2009. "International Portfolio Allocation under Model Uncertainty," NBER Working Papers 14734, National Bureau of Economic Research, Inc.
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael B. Devereux & Alan Sutherland, 2011.
"Country Portfolios In Open Economy Macro‐Models,"
Journal of the European Economic Association,
European Economic Association, vol. 9(2), pages 337-369, 04.
- Michael B. Devereux & Alan Sutherland, 2008. "Country portfolios in open economy macro models," Globalization and Monetary Policy Institute Working Paper 09, Federal Reserve Bank of Dallas.
- Michael B. Devereux & Alan Sutherland, 2008. "Country Portfolios in Open Economy Macro Models," NBER Working Papers 14372, National Bureau of Economic Research, Inc.
- David K. Backus & Federico Gavazzoni & Christopher Telmer & Stanley E. Zin, 2010. "Monetary Policy and the Uncovered Interest Parity Puzzle," NBER Working Papers 16218, National Bureau of Economic Research, Inc.
- Shiller, Robert J., 1995.
"Aggregate income risks and hedging mechanisms,"
The Quarterly Review of Economics and Finance,
Elsevier, vol. 35(2), pages 119-152.
- Robert J. Shiller, 1993. "Aggregate Income Risks and Hedging Mechanisms," Cowles Foundation Discussion Papers 1048, Cowles Foundation for Research in Economics, Yale University.
- Robert J. Shiller, 1993. "Aggregate Income Risks and Hedging Mechanisms," NBER Working Papers 4396, National Bureau of Economic Research, Inc.
- Hansen, Lars Peter & Sargent, Thomas J., 2005. "Robust estimation and control under commitment," Journal of Economic Theory, Elsevier, vol. 124(2), pages 258-301, October.
- Hanno Lustig & Stijn Van Nieuwerburgh, 2008.
"The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street,"
Review of Financial Studies,
Society for Financial Studies, vol. 21(5), pages 2097-2137, September.
- Hanno Lustig & Stijn Van Nieuwerburgh, 2005. "The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street," NBER Working Papers 11564, National Bureau of Economic Research, Inc.
- Tomasz Strzalecki, 2011.
"Axiomatic Foundations of Multiplier Preferences,"
Levine's Working Paper Archive
786969000000000126, David K. Levine.
- David Backus & Bryan Routledge & Stanley Zin, 2004.
"Exotic Preferences for Macroeconomists,"
NBER Working Papers
10597, National Bureau of Economic Research, Inc.
- Cole, Harold L. & Obstfeld, Maurice, 1991.
"Commodity trade and international risk sharing : How much do financial markets matter?,"
Journal of Monetary Economics,
Elsevier, vol. 28(1), pages 3-24, August.
- Harold L. Cole & Maurice Obstfeld, 1991. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
- Giannis Vardas & Anastasios Xepapadeas, 2004. "Uncertainty Aversion and Robust Portfolio Choices," Working Papers 0408, University of Crete, Department of Economics.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros) or (Michael P. Albert).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.