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Trade in Risky Assets

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  • Lars E.O. Svensson

Abstract

This paper develops a theory of the international trade pattern in risky assets by applying the law of comparative advantage to asset trade. According to this law there is a tendency for a country to import assets that have relatively high autarky prices. The autarky price of an asset is high if the autarky real interest rate is low, or if the asset's autarky risk measure (the product of the risk premium and the asset price) is low. It is examined how autarky interest rates and risk measures are affected by international differences in (i) stochastic properties of output/endowment s , (ii) the rate of time preference, (iii) the degree of risk aversion, and (iv) subjective beliefs, and how such differences predict overall capital account deficits or surpluses as well as the composition of the capital account into trade in arbitrary risky assets and the special cases of sure indexed bonds, stocks (claims to output), and Arrow- Debreu securities.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2403.

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Date of creation: Oct 1987
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Publication status: published as American Economic Review, Vol. 78, No. 3, (June 1988).
Handle: RePEc:nbr:nberwo:2403

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  1. Deardorff, Alan V, 1982. "The General Validity of the Heckscher-Ohlin Theorem," American Economic Review, American Economic Association, vol. 72(4), pages 683-94, September.
  2. Cole, Harold, 1988. "Financial Structure and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 237-59, May.
  3. Markusen, James R & Svensson, Lars E O, 1985. "Trade in Goods and Factors with International Differences in Technology," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 175-92, February.
  4. Deardorff, Alan V, 1980. "The General Validity of the Law of Comparative Advantage," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 941-57, October.
  5. Torsten Persson & Lars E.O. Svensson, 1989. "Exchange Rate Variability And Asset Trade," NBER Working Papers 2811, National Bureau of Economic Research, Inc.
  6. Lars E.O. Svensson, 1982. "Factor Trade and Goods Trade," NBER Working Papers 0999, National Bureau of Economic Research, Inc.
  7. Helpman, Elhanan & Razin, Assaf, 1978. "A theory of international trade under uncertainty," MPRA Paper 22112, University Library of Munich, Germany.
  8. Wilfred J. Ethier & Lars E.O. Svensson, 1983. "The Theorems of International Trade with Factor Mobility," NBER Working Papers 1115, National Bureau of Economic Research, Inc.
  9. Alan C. Stockman & Lars E.O. Svensson, 1985. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc.
  10. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  11. Grossman, Gene M & Razin, Assaf, 1985. "The Pattern of Trade in a Ricardian Model with Country-Specific Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 193-202, February.
  12. Pomery, John, 1984. "Uncertainty in trade models," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 9, pages 419-465 Elsevier.
  13. Stulz, ReneM., 1981. "A model of international asset pricing," Journal of Financial Economics, Elsevier, vol. 9(4), pages 383-406, December.
  14. Selden, Larry, 1979. "An OCE Analysis of the Effect of Uncertainty on Saving under Risk Preference Independence," Review of Economic Studies, Wiley Blackwell, vol. 46(1), pages 73-82, January.
  15. 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.
  16. Stockman, Alan C & Hernandez D, Alejandro, 1988. "Exchange Controls, Capital Controls, and International Financial Markets," American Economic Review, American Economic Association, vol. 78(3), pages 362-74, June.
  17. Stulz, Rene M, 1984. "Currency Preferences, Purchasing Power Risks, and the Determination of Exchange Rates in an Optimizing Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(3), pages 302-16, August.
  18. Lloyd, P. J. & Schweinberger, A. G., 1988. "Trade expenditure functions and the gains from trade," Journal of International Economics, Elsevier, vol. 24(3-4), pages 275-297, May.
  19. Svensson, Lars E. O., 1985. "Currency prices, terms of trade, and interest rates: A general equilibrium asset-pricing cash-in-advance approach," Journal of International Economics, Elsevier, vol. 18(1-2), pages 17-41, February.
  20. Grossman, Gene M & Razin, Assaf, 1984. "International Capital Movements under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 286-306, April.
  21. Hal R. Varian, 1986. "Differences of opinion in financial markets," Proceedings, Federal Reserve Bank of St. Louis, pages 3-40.
  22. Selden, Larry, 1978. "A New Representation of Preferences over "Certain A Uncertain" Consumption Pairs: The "Ordinal Certainty Equivalent" Hypothesis," Econometrica, Econometric Society, vol. 46(5), pages 1045-60, September.
  23. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  24. Dixit, Avinash & Woodland, Alan, 1982. "The relationship between factor endowments and commodity trade," Journal of International Economics, Elsevier, vol. 13(3-4), pages 201-214, November.
  25. Lars E.O. Svensson, 1987. "Trade in Nominal Assets: Monetary Policy, and Price Level and Exchange Rate Risk," NBER Working Papers 2417, National Bureau of Economic Research, Inc.
  26. Ethier, Wilfred J., 1984. "Higher dimensional issues in trade theory," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 3, pages 131-184 Elsevier.
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