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A dynamic equilibrium model of imperfectly integrated financial markets

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  • Nicolas Coeurdacier

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

  • Stéphane Guibaud

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

Abstract

We build a continous-time general equilibrium model of a two-country, pure-exchange economy featuring taxes on the repatriation of dividends. We find approximate closed-form expressions for asset prices, returns joint dynamics and equity portfolios, thus giving a full description of equilibrium in-between the polar cases of perfect integration and full segmentation. We show that large home bias in portfolios can result from small frictions on international financial markets. The reason is that, partly due to portfolio rebalancing, the international correlation of returns is very high - making assets close substitutes and implying that slight frictions have a dramatic effect on portfolio composition.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00590775.

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Date of creation: Aug 2005
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Handle: RePEc:hal:psewpa:halshs-00590775

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00590775
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Related research

Keywords: asset pricing ; financial integration ; home bias in portfolio ; international stock returns correlations ; asymmetric taxation ; investors heterogeneity ; stochastic pareto-negishi weight;

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