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Cross-border portfolio diversification under trade linkages

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  • Khalil, Makram

Abstract

Using the IMF CPIS data on cross-border financial assets, I find that the share of equity in a bilateral portfolio decreases with bilateral trade. Strengthening trade linkages is strongly related to rising holdings of foreign debt but not so to holdings of foreign equity. The results are rationalised by a model of international portfolios in which deepening trade integration increases the exposure of the household consumption basket to deteriorating terms of trade. With rising trade, a sufficiently risk averse representative agent therefore chooses to hold a larger amount of foreign bonds that are well suited to hedge this risk.

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  • Khalil, Makram, 2019. "Cross-border portfolio diversification under trade linkages," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 114-128.
    • Handle: RePEc:eee:moneco:v:104:y:2019:i:c:p:114-128
    DOI: 10.1016/j.jmoneco.2018.10.001
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    More about this item

    Keywords

    Cross-border portfolio choice; Equity and debt; Two-country two-goods model; Coordinated Portfolio Investment Survey (CPIS);
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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