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Do trade costs in goods market lead to home bias in equities?

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  • Nicolas Coeurdacier

Abstract

Two of the main puzzles in international economics are the consumption and the portfolio home biases. We solve for international equity portfolios in a two-country/two-good stochastic equilibrium model with trade costs in goods markets. We show that introducing trade costs, as suggested by Obstfeld and Rogoff [Obstfeld, M., Rogoff, K., 2000a. The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? NBER Macroeconomics Annual, 15], is not sufficient to explain these two puzzles simultaneously. On the contrary, we find that trade costs create a foreign bias in portfolios for reasonable parameter values. This result is robust to the addition of non-tradable goods for standard calibrations of the preferences.

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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/c8dmi8nm4pdjkuc9g708n2m4m.

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Date of creation: Feb 2009
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Publication status: Published in Journal of International Economics, 2009, pp.86-100
Handle: RePEc:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g708n2m4m

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Keywords: Trade costs; Home bias; Portfolio choice; International macroeconomics;

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