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International Portfolios, Capital Accumulation and Foreign Assets Dynamics

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Author Info
Coeurdacier, Nicolas
Kollmann, Robert
Martin, Philippe

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Abstract

Despite the liberalization of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanations of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation, shocks to the efficiency of physical investment, as well as international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuations in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6902.

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Date of creation: Jul 2008
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Handle: RePEc:cpr:ceprdp:6902

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Related research
Keywords: capital accumulation; capital flows; current account; international equity and bond portfolios; terms of trade; valuation effects;

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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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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.:
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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. Nicolas Coeurdacier & Pierre-Olivier Gourinchas, 2008. "When bonds matter: home bias in goods and assets," Working Paper Series 2008-25, Federal Reserve Bank of San Francisco. [Downloadable!]
  2. Michael B. Devereux & Alan Sutherland, 2008. "Country Portfolios in Open Economy Macro Models," NBER Working Papers 14372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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