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Financial Globalization, Portfolio Diversification, and the Pattern of International Trade

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Author Info

  • Miklós Koren

Abstract

The paper provides a general-equilibrium model where incomplete international financial markets lead to insufficient industrial specialization and low international trade. As international portfolio diversification is limited and productivity is uncertain, investors wish to maintain a diversified industrial structure rather than specializing according to their comparative advantage. Financial globalization then induces more specialization and more trade. The present framework yields explicit closed-form solutions for the volume and the structure of trade. Empirical results support the implications of the theory. Trade in financially open countries is (i) higher, (ii) more dependent on productivity differences, and (iii) less sensitive to industry risks.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/233.

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Length: 47
Date of creation: 01 Dec 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/233

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Related research

Keywords: Markets; Economic models;

References

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  1. Sebnem Kalemli-Ozcan & Bent E. S�rensen & Oved Yosha, 1999. "Risk Sharing and Industrial Specialization: Regional and International Evidence," Working Papers 99-16, Brown University, Department of Economics.
  2. Robert J. Shiller & Stefano Athanasoulis, 2001. "The Significance of the Market Portfolio," Yale School of Management Working Papers ysm133, Yale School of Management.
  3. Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
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  5. Maurice Obstfeld., 1993. "Risk-Taking, Global Diversification, and Growth," Center for International and Development Economics Research (CIDER) Working Papers C93-016, University of California at Berkeley.
  6. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
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  8. Laurent Calvet & Martin Gonzalez-Eiras & Paolo Sodini, 2003. "Financial Innovation, Market Participation and Asset Prices," NBER Working Papers 9840, National Bureau of Economic Research, Inc.
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  10. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
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  14. Ruffin, Roy J., 1974. "Comparative advantage under uncertainty," Journal of International Economics, Elsevier, vol. 4(3), pages 261-273, August.
  15. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial Globalization and Real Regionalization," CEPR Discussion Papers 3268, C.E.P.R. Discussion Papers.
  16. Feeney, JoAnne, 1999. "International risk sharing, learning by doing, and growth," Journal of Development Economics, Elsevier, vol. 58(2), pages 297-318, April.
  17. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  18. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
  19. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  20. Roll, Richard, 1992. " Industrial Structure and the Comparative Behavior of International Stock Market Indices," Journal of Finance, American Finance Association, vol. 47(1), pages 3-41, March.
  21. Ashoka Mody & Abdul Abiad, 2003. "Financial Reform: What Shakes It? What Shapes It?," IMF Working Papers 03/70, International Monetary Fund.
  22. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
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Citations

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Cited by:
  1. Alan M. Taylor & Janine L. F. Wilson, 2006. "International Trade and Finance under the Two Hegemons: Complementaries in the United Kingdom 1870-1913 and the United States 1920-30," NBER Working Papers 12543, National Bureau of Economic Research, Inc.
  2. Taylor, Alan M. & Wilson, Janine L.F., 2011. "International trade and finance: Complementaries in the United Kingdom 1870-1913 and the United States 1920-1930," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 268-288, February.
  3. Basu, Arnab K. & Chau, Nancy H., 2007. "A risk-based rationale for two-way capital flows: Why do capital flights and inward foreign direct investments co-exist?," International Review of Economics & Finance, Elsevier, vol. 16(1), pages 37-59.
  4. Miklos Koren & Silvana Tenreyro, 2003. "Diversification and development," Working Papers 03-3, Federal Reserve Bank of Boston.
  5. Alejandro Cuñat & Christian Fons-Rosen, 2013. "Relative Factor Endowments And International Portfolio Choice," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 166-200, 02.
  6. Julian di Giovanni & Andrei A. Levchenko, 2010. "The Risk Content of Exports: A Portfolio View of International Trade," NBER Working Papers 16005, National Bureau of Economic Research, Inc.

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