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Goods Trade and International Equity Portfolios

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Author Info

  • Fabrice Collard

    ()
    (School of Economics, University of Adelaide)

  • Harris Dellas

    ()
    (Department of Economics, University of Bern)

  • Behzad Diba

    (Department of Economics, Georgetown University)

  • Alan Stockman

    (Department of Economics, University of Rochester)

Abstract

We show that international trade in goods is the main determinant of international equity portfolios and it also offers a compelling - theoretically and empirically - resolution of the portfolio home bias puzzle. The model implies that investors can achieve full international risk diversification if the share of wealth invested in foreign equity matches their country's degree of openness (the imports to GDP share). The empirical evidence strongly supports this implication.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2009-14.pdf
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Bibliographic Info

Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2009-14.

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Length: 47 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:adl:wpaper:2009-14

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Postal: Adelaide SA 5005
Phone: (618) 8303 5540
Web page: http://www.economics.adelaide.edu.au/
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Keywords: Portfolio home bias; imports; non-traded goods;

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References

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  1. Stockman, Alan C. & Dellas, Harris, 1989. "International portfolio nondiversification and exchange rate variability," Journal of International Economics, Elsevier, vol. 26(3-4), pages 271-289, May.
  2. Jonathan Heathcote & Fabrizio Perri, 2007. "The international diversification puzzle is not as bad as you think," Staff Report 398, Federal Reserve Bank of Minneapolis.
  3. Robert Kollmann, 2006. "A Dynamic Equilibrium Model of International Portfolio Holdings: Comment," Econometrica, Econometric Society, vol. 74(1), pages 269-273, 01.
  4. Marianne Baxter & Urban J. Jermann & Robert G. King, 1995. "Nontraded Goods, Nontraded Factors, and International Non-Diversification," NBER Working Papers 5175, National Bureau of Economic Research, Inc.
  5. Antonin Aviat & Nicolas Coeurdacier, 2007. "The geography of trade in goods and asset holdings," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  6. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2004. "Large Devaluations and the Real Exchange Rate," NBER Working Papers 10986, National Bureau of Economic Research, Inc.
  7. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
  8. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
  9. Tesar, Linda L., 1993. "International risk-sharing and non-traded goods," Journal of International Economics, Elsevier, vol. 35(1-2), pages 69-89, August.
  10. Coeurdacier, Nicolas, 2006. "Do Trade Costs in Goods Market Lead to Home Bias in Equities?," ESSEC Working Papers DR 06011, ESSEC Research Center, ESSEC Business School.
  11. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
  12. Angel Serrat, 2001. "A Dynamic Equilibrium Model of International Portfolio Holdings," Econometrica, Econometric Society, vol. 69(6), pages 1467-1489, November.
  13. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
  14. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October.
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Citations

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Cited by:
  1. Coeurdacier, Nicolas & Rey, Hélène, 2012. "Home Bias in Open Economy Financial Macroeconomics," CEPR Discussion Papers 8746, C.E.P.R. Discussion Papers.
  2. Benigno, Gianluca & Küçük, Hande, 2012. "Portfolio Allocation and International Risk Sharing," CEPR Discussion Papers 8810, C.E.P.R. Discussion Papers.
  3. Philipp Harms & Mathias Hoffmann & Christina Ortseifer, 2010. "The Home Bias in Equities and Distribution Costs," Working Papers 10.03, Swiss National Bank, Study Center Gerzensee.
  4. repec:onb:oenbwp:y::i:154:b:1 is not listed on IDEAS
  5. Dellas, Harris & Tavlas, George, 2013. "Exchange rate regimes and asset prices," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 85-94.
  6. Tobias Broer, 2013. "The home bias of the poor: terms of trade effects and portfolios across the wealth distribution," 2013 Meeting Papers 618, Society for Economic Dynamics.
  7. Hnatkovska, Viktoria, 2010. "Home bias and high turnover: Dynamic portfolio choice with incomplete markets," Journal of International Economics, Elsevier, vol. 80(1), pages 113-128, January.
  8. Ina Simonovska & Athanasios Geromichalos, 2011. "Asset Liquidity and International Portfolio Choice," 2011 Meeting Papers 756, Society for Economic Dynamics.
  9. Hassan, Tarek, 2012. "Country Size, Currency Unions, and International Asset Returns," CEPR Discussion Papers 8991, C.E.P.R. Discussion Papers.
  10. Tarek Alexander Hassan, 2010. "Country Size, Currency Areas, and International Asset Returns," 2010 Meeting Papers 365, Society for Economic Dynamics.
  11. van Wincoop, Eric & Warnock, Francis E., 2010. "Can trade costs in goods explain home bias in assets?," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1108-1123, October.
  12. Leon, Jorge, 2010. "International Portfolios and the U.S. Current Account," MPRA Paper 45281, University Library of Munich, Germany.

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