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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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Related research

Keywords: Portfolio home bias; imports; non-traded goods;

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References

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  1. Tesar, Linda L., 1993. "International risk-sharing and non-traded goods," Journal of International Economics, Elsevier, vol. 35(1-2), pages 69-89, August.
  2. Sergio Rebelo & Ariel Burstein & Martin Eichenbaum, 2004. "Large Devaluations and the Real Exchange Rate," 2004 Meeting Papers 137, Society for Economic Dynamics.
  3. Fabrizio Perri & Jonathan Heathcote, 2007. "The International Diversification Puzzle Is Not as Bad as You Think," Working Papers 2007-3, University of Minnesota, Department of Economics, revised 08 Oct 2007.
  4. Nicolas Coeurdacier, 2006. "Do trade costs in goods market lead to home bias in equities?," 2006 Meeting Papers 111, Society for Economic Dynamics.
  5. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  6. Aviat, Antonin & Coeurdacier, Nicolas, 2007. "The geography of trade in goods and asset holdings," Journal of International Economics, Elsevier, vol. 71(1), pages 22-51, March.
  7. Jun-Koo Kang & Rene M. Stulz, 1995. "Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan," NBER Working Papers 5166, National Bureau of Economic Research, Inc.
  8. Baxter, Marianne & Jermann, Urban J. & King, Robert G., 1998. "Nontraded goods, nontraded factors, and international non-diversification," Journal of International Economics, Elsevier, vol. 44(2), pages 211-229, April.
  9. Robert Kollmann, 2006. "A Dynamic Equilibrium Model of International Portfolio Holdings: Comment," Econometrica, Econometric Society, vol. 74(1), pages 269-273, 01.
  10. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
  11. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  12. 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.
  13. Angel Serrat, 2001. "A Dynamic Equilibrium Model of International Portfolio Holdings," Econometrica, Econometric Society, vol. 69(6), pages 1467-1489, November.
  14. 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.
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Citations

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Cited by:
  1. 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.
  2. Hassan, Tarek, 2012. "Country Size, Currency Unions, and International Asset Returns," CEPR Discussion Papers 8991, C.E.P.R. Discussion Papers.
  3. Ina Simonovska & Athanasios Geromichalos, 2011. "Asset Liquidity and International Portfolio Choice," 2011 Meeting Papers 756, Society for Economic Dynamics.
  4. 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.
  5. Tarek Alexander Hassan, 2010. "Country Size, Currency Areas, and International Asset Returns," 2010 Meeting Papers 365, Society for Economic Dynamics.
  6. Gianluca Benigno & Hande Küçük-Tuger, 2011. "Portfolio Allocation and International Risk Sharing," CEP Discussion Papers dp1048, Centre for Economic Performance, LSE.
  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. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.

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