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Goods Trade and International Equity Portfolios

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  • Fabrice Collard
  • Harris Dellas
  • Behzad Diba
  • Alan Stockman

Abstract

We show that international trade in goods is the main determinant of international equity portfolios and 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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13612.

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Date of creation: Nov 2007
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Handle: RePEc:nbr:nberwo:13612

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  1. 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.
  2. Nicolas Coeurdacier, 2006. "Do trade costs in goods market lead to home bias in equities?," 2006 Meeting Papers 111, Society for Economic Dynamics.
  3. Jonathan Heathcote & Fabrizio Perri, 2004. "The international diversification puzzle is not as bad as you think," 2004 Meeting Papers 152, Society for Economic Dynamics.
  4. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2004. "Large Devaluations and the Real Exchange Rate," RCER Working Papers 513, University of Rochester - Center for Economic Research (RCER).
  5. Aviat, Antonin & Coeurdacier, Nicolas, 2006. "The Geography of Trade in Goods and Asset Holdings," ESSEC Working Papers DR 06012, ESSEC Research Center, ESSEC Business School.
  6. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  7. Angel Serrat, 2001. "A Dynamic Equilibrium Model of International Portfolio Holdings," Econometrica, Econometric Society, vol. 69(6), pages 1467-1489, November.
  8. 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.
  9. 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.
  10. Tesar, Linda L., 1993. "International risk-sharing and non-traded goods," Journal of International Economics, Elsevier, vol. 35(1-2), pages 69-89, August.
  11. 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.
  12. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
  13. 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.
  14. Robert Kollmann, 2006. "A Dynamic Equilibrium Model of International Portfolio Holdings: Comment," Econometrica, Econometric Society, vol. 74(1), pages 269-273, 01.
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Citations

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Cited by:
  1. 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.
  2. Benigno, Gianluca & Küçük, Hande, 2012. "Portfolio Allocation and International Risk Sharing," CEPR Discussion Papers 8810, C.E.P.R. Discussion Papers.
  3. Tarek A. Hassan, 2009. "Country Size, Currency Unions, and International Asset Returns," Working Papers 154, Oesterreichische Nationalbank (Austrian Central Bank).
  4. Nicolas Coeurdacier & Hélène Rey, 2011. "Home Bias in Open Economy Financial Macroeconomics," NBER Working Papers 17691, National Bureau of Economic Research, Inc.
  5. Ina Simonovska & Athanasios Geromichalos, 2011. "Asset Liquidity and International Portfolio Choice," 2011 Meeting Papers 756, Society for Economic Dynamics.
  6. 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.
  7. Dellas, Harris & Tavlas, George, 2013. "Exchange rate regimes and asset prices," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 85-94.
  8. Tobias Broer, 2013. "The home bias of the poor: terms of trade effects and portfolios across the wealth distribution," 2013 Meeting Papers 618, Society for Economic Dynamics.
  9. Harms, Philipp & Hoffmann, Mathias & Ortseifer, Christina, 2010. "The home bias in equities and distribution costs," Discussion Paper Series 1: Economic Studies 2010,24, Deutsche Bundesbank, Research Centre.
  10. Tarek Alexander Hassan, 2010. "Country Size, Currency Areas, and International Asset Returns," 2010 Meeting Papers 365, Society for Economic Dynamics.
  11. Leon, Jorge, 2010. "International Portfolios and the U.S. Current Account," MPRA Paper 45281, University Library of Munich, Germany.
  12. repec:onb:oenbwp:y::i:154:b:1 is not listed on IDEAS

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