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International Portfolios: A Comparison of Solution Methods

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  • Katrin Rabitsch

    ()
    (Department of Economics, Vienna University of Economics and Business)

  • Serhiy Stepanchuk

    ()
    (École Polytechnique Fédérale de Lausanne)

  • Viktor Tsyrennikov

    ()
    (Cornell University)

Abstract

We compare the performance of the perturbation-based (local) portfolio solution method of Devereux and Sutherland (2010a, 2011) with a global solution method. We find that the local method performs very well when the model is designed to capture stylized macroeconomic facts and countries/agents are symmetric, i.e. when the latter have similar size, face similar risks and trade assets with similar risk properties. It performs less satisfactory when the agents engaged in financial trade are asymmetric. The global solution method performs substantially better when the model is parameterized to match the observed equity premium, a key stylized finance fact.

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Paper provided by Vienna University of Economics, Department of Economics in its series Department of Economics Working Papers with number wuwp159.

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Date of creation: Jan 2014
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Handle: RePEc:wiw:wiwwuw:wuwp159

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Keywords: Country Portfolios; Solution Methods;

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