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Trade Policy and Risk Diversification

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  • Barbara Pfeffer
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    Abstract

    The paper analyses the influence of trade policy on the investment decisions of a rep- resentative individual. In particular, the increased uncertainty of future income is con- sidered in the investment behaviour of individuals. The optimal portfolio-decision of a representative working individual is analysed in comparison to a non-working shareholder. The paper finds an important influence from trade policy on the saving and investment behaviour of a working individual. Yet the optimal demand for an asset does not always increase if a protectionist trade policy is introduced in the corresponding sector as might be expected. The asset covariance and the labor risk correlation, especially the working location of the individual, determine the final results of the investment decision and can even reverse the expected effect from protection. Moreover, an effective hedge for the income risk is not possible in most of the observed scenarios.

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    File URL: http://www.wiwi.uni-siegen.de/vwl/repec/sie/papers/126-06.pdf
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    Bibliographic Info

    Paper provided by Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht in its series Volkswirtschaftliche Diskussionsbeiträge with number 126-06.

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    Length: 26 pages
    Date of creation: 2006
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    Handle: RePEc:sie:siegen:126-06

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    Web page: http://www.uni-siegen.de/fb5/vwl/research/diskussionsbeitraege/
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    Related research

    Keywords: Protection; Portfolio Choice; Risk Diversification; Income Risk;

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    1. William N. Goetzmann & Alok Kumar, 2008. "Equity Portfolio Diversification," Review of Finance, European Finance Association, vol. 12(3), pages 433-463.
    2. Harms, Philipp & Hefeker, Carsten, 2003. "Globalization and unemployment: the role of international diversification," Economics Letters, Elsevier, vol. 78(2), pages 281-286, February.
    3. Massa, Massimo & Simonov, Andrei, 2004. "Hedging, Familiarity and Portfolio Choice," SIFR Research Report Series 21, Institute for Financial Research.
    4. Urban J. Jermann, 1998. "International Portfolio Diversification and Labor/Leisure Choice," NBER Working Papers 6382, National Bureau of Economic Research, Inc.
    5. Carol C. Bertaut & Michael Haliassos, 1996. "Precautionary portfolio behavior from a life-cycle perspective," International Finance Discussion Papers 542, Board of Governors of the Federal Reserve System (U.S.).
    6. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
    7. Natalia T. Tamirisa, 1999. "Exchange and Capital Controls as Barriers to Trade," IMF Staff Papers, Palgrave Macmillan, vol. 46(1), pages 4.
    8. Svaleryd, Helena & Vlachos, Jonas, 1999. "Markets for Risk and Openness to Trade: How are they Related?," Working Paper Series in Economics and Finance 327, Stockholm School of Economics, revised 10 Sep 2000.
    9. Jonathan Eaton & Gene M. Grossman, 1985. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete," Canadian Journal of Economics, Canadian Economics Association, vol. 18(2), pages 258-72, May.
    10. Edward Schlee & Christian Gollier, . "Increased Risk-Bearing with Background Risk," Working Papers 2132848, Department of Economics, W. P. Carey School of Business, Arizona State University.
    11. DREZE, Jacques H. & MODIGLIANI, Franco, . "Cosumption decisions under uncertainty," CORE Discussion Papers RP -119, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. Tom Krebs & Pravin Krishna, 2005. "Trade Policy, Income Risk and Welfare," 2005 Meeting Papers 271, Society for Economic Dynamics.
    13. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
    14. Christian Julliard, 2004. "Human capital and international portfolio choice," LSE Research Online Documents on Economics 4813, London School of Economics and Political Science, LSE Library.
    15. Costello, Donna M, 1993. "A Cross-Country, Cross-Industry Comparison of Productivity Growth," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 207-22, April.
    16. Cassing, James H., 1996. "Protectionist mutual funds," European Journal of Political Economy, Elsevier, vol. 12(1), pages 1-18, April.
    17. Aizenman, Joshua, 2008. "On the hidden links between financial and trade opening," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 372-386, April.
    18. Harold L. Cole & Maurice Obstfeld, 1989. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
    19. Robin Brooks & Marco Del Negro, 2002. "The rise in comovement across national stock markets: market integration or IT bubble?," Working Paper 2002-17, Federal Reserve Bank of Atlanta.
    20. Marco Del Negro & Robin Brooks, 2005. "A Latent Factor Model with Global, Country, and Industry Shocks for International Stock Returns," IMF Working Papers 05/52, International Monetary Fund.
    21. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
    22. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
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