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Trade in Risky Assets

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Author Info
Lars E.O. Svensson

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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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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: Apr 1989
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Handle: RePEc:nbr:nberwo:2403

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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.:
  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
  7. Stulz, ReneM., 1981. "A model of international asset pricing," Journal of Financial Economics, Elsevier, vol. 9(4), pages 383-406, December. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Alan C. Stockman & Lars E.O. Svensson, 1987. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
  14. Torsten Persson & Lars E.O. Svensson, 1990. "Exchange Rate Variability And Asset Trade," NBER Working Papers 2811, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Hal R. Varian, 1986. "Differences of opinion in financial markets," Proceedings, Federal Reserve Bank of St. Louis, pages 3-40.
  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. [Downloadable!] (restricted)
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  17. 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. [Downloadable!] (restricted)
  18. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn. [Downloadable!] (restricted)
  19. Svensson, Lars E.O., 1984. "Factor trade and goods trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 365-378, May. [Downloadable!] (restricted)
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  20. 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. [Downloadable!] (restricted)
  21. Svensson, Lars E. O., 1989. "Trade in nominal assets : Monetary policy, and price level and exchange rate risk," Journal of International Economics, Elsevier, vol. 26(1-2), pages 1-28, February. [Downloadable!] (restricted)
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  22. 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. [Downloadable!] (restricted)
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  23. 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  25. Selden, Larry, 1979. "An OCE Analysis of the Effect of Uncertainty on Saving under Risk Preference Independence," Review of Economic Studies, Blackwell Publishing, vol. 46(1), pages 73-82, January. [Downloadable!] (restricted)
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