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International Portfolio Equilibrium and the Current Account

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Author Info
Kollmann, Robert

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Abstract

This paper analyses the determinants of international asset portfolios, using a neoclassical dynamic general equilibrium model with home bias in consumption. For plausible parameter values, the model explains the fact that typical investors hold most of their wealth in domestic assets (portfolio home bias). In the model, the current account balance (change in net foreign assets) is mainly driven by fluctuations in equity prices; the current account is predicted to be highly volatile and to exhibit low serial correlation; changes in a country's foreign equity assets and liabilities are predicted to be highly positively correlated. The paper constructs current account series that include external capital gains/losses, for 17 OECD economies. The behaviour of those series confirms the theoretical predictions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5512.

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Date of creation: Feb 2006
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Handle: RePEc:cpr:ceprdp:5512

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Keywords: consumption and portfolio home bias current account international portfolio holdings

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Find related papers by JEL classification:
F2 - International Economics - - International Factor Movements and International Business
F3 - International Economics - - International Finance
G1 - Financial Economics - - General Financial Markets

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References listed on IDEAS
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.:
  1. Cantor, Richard & Mark, Nelson C, 1988. "The International Transmission of Real Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 493-507, August. [Downloadable!] (restricted)
  2. Kollmann, Robert, 2002. "Monetary policy rules in the open economy: effects on welfare and business cycles," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 989-1015, July. [Downloadable!] (restricted)
    Other versions:
  3. Paul R. Bergin, 2004. "How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?," NBER Working Papers 10356, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Rene M. Stulz, 2005. "The Limits of Financial Globalization," NBER Working Papers 11070, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Baxter, Marianne & Jermann, Urban J, 1997. "The International Diversification Puzzle Is Worse Than You Think," American Economic Review, American Economic Association, vol. 87(1), pages 170-80, March. [Downloadable!] (restricted)
    Other versions:
  6. Jonathan Heathcote & Fabrizio Perri, 2004. "The international diversification puzzle is not as bad as you think," 2004 Meeting Papers 152, Society for Economic Dynamics.
    Other versions:
  7. David Backus & Gian Luca Clementi, 2005. "Current Account Fact and Fiction," 2005 Meeting Papers 115, Society for Economic Dynamics.
  8. Jean Tirole, 2003. "Inefficient Foreign Borrowing: A Dual-and Common-Agency Perspective," Levine's Bibliography 506439000000000136, UCLA Department of Economics. [Downloadable!]
    Other versions:
  9. Tamim Bayoumi, 1999. "Estimating Trade Equations from Aggregate Bilateral Data," IMF Working Papers 99/74, International Monetary Fund.
    Other versions:
  10. Uppal, Raman, 1993. " A General Equilibrium Model of International Portfolio Choice," Journal of Finance, American Finance Association, vol. 48(2), pages 529-53, June. [Downloadable!] (restricted)
  11. Robert Kollmann, 2006. "A Dynamic Equilibrium Model of International Portfolio Holdings: Comment," Econometrica, Econometric Society, vol. 74(1), pages 269-273, 01. [Downloadable!] (restricted)
  12. Charles Engel & Akito Matsumoto, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund. [Downloadable!]
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  13. 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. [Downloadable!] (restricted)
    Other versions:
  14. Martin D. D. Evans & Viktoria Hnatkovska, 2005. "International Capital Flows, Returns and World Financial Integration," NBER Working Papers 11701, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege," CEPR Discussion Papers 5220, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  16. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics. [Downloadable!]
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  17. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2005. "Country Portfolios," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 914-945, 06. [Downloadable!] (restricted)
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  18. Kollmann, Robert, 2001. "Explaining international comovements of output and asset returns: The role of money and nominal rigidities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1547-1583, October. [Downloadable!] (restricted)
  19. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jan. [Downloadable!]
  20. Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004. "Information costs and home bias: an analysis of US holdings of foreign equities," Journal of International Economics, Elsevier, vol. 62(2), pages 313-336, March. [Downloadable!] (restricted)
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  21. 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. [Downloadable!] (restricted)
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  22. Pavlova, Anna & Rigobon, Roberto, 2003. "Asset Prices and Exchange Rates," Working papers 4322-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  23. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2006. "The Valuation Channel of External Adjustment," 2006 Meeting Papers 195, Society for Economic Dynamics. [Downloadable!]
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  24. Dumas, Bernard, 1994. "Some models of the international capital market," European Economic Review, Elsevier, vol. 38(3-4), pages 923-931, April. [Downloadable!] (restricted)
  25. Nicolas Coeurdacier & Stéphane Guibaud, 2005. "A dynamic equilibrium model of imperfectly integrated financial markets," PSE Working Papers 2005-24, PSE (Ecole normale supérieure). [Downloadable!]
  26. Bottazzi, Laura & Pesenti, Paolo & van Wincoop, Eric, 1996. "Wages, profits and the international portfolio puzzle," European Economic Review, Elsevier, vol. 40(2), pages 219-254, February. [Downloadable!] (restricted)
  27. Benoit Mercereau, 2003. "The Role of Stock Markets in Current Account Dynamics: a Time Series Approach," Topics in Macroeconomics, Berkeley Electronic Press, vol. 3(1), pages 1063-1063. [Downloadable!] (restricted)
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  28. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," The Institute for International Integration Studies Discussion Paper Series iiisdp124, IIIS. [Downloadable!]
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  29. 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. [Downloadable!] (restricted)
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  30. 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. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)

  1. 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. [Downloadable!]
    Other versions:
  2. Michael B. Devereux & Alan Sutherland, 2007. "Solving for Country Portfolios in Open Economy Macro Models," IMF Working Papers 07/284, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Cédric Tille & Eric van Wincoop, 2007. "International capital flows," Staff Reports 280, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  4. Devereux, Michael B & Saito, Makoto, 2006. "A Portfolio Theory of International Capital Flows," CEPR Discussion Papers 5746, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Devereux, Michael B & Sutherland, Alan, 2007. "Country Portfolio Dynamics," CEPR Discussion Papers 6208, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Lane, Philip R. & Shambaugh, Jay C, 2007. "Financial Exchange Rates and International Currency Exposures," CEPR Discussion Papers 6473, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Zeno Enders & Gernot J. Mueller, 2006. "S-Curve Redux: On the International Transmission of Technology Shocks," Economics Working Papers ECO2006/36, European University Institute. [Downloadable!]
  8. Devereux, Michael B & Sutherland, Alan, 2007. "Financial Globalization and Monetary Policy," CEPR Discussion Papers 6147, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Fabrice Collard & Harris Dellas & Behzad Diba & Alan Stockman, 2007. "Goods Trade and International Equity Portfolios," NBER Working Papers 13612, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Martin Bodenstein, 2006. "Closing open economy models," International Finance Discussion Papers 867, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2007. "International Portfolios with Supply, Demand and Redistributive Shocks," CEPR Discussion Papers 6482, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  12. 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. [Downloadable!]
  13. Guy Meredith, 2007. "Debt Dynamics and Global Imbalances: Some Conventional Views Reconsidered," IMF Working Papers 07/4, International Monetary Fund. [Downloadable!]
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