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Portfolio Allocation and International Risk Sharing

Listed author(s):
  • Gianluca Benigno
  • Hande Küçük-Tuger

Recent contributions have shown that it is possible to account for the so-called consumption-real exchange anomaly in models with goods market frictions where international asset trade is limited to a riskless bond. In this paper, we consider a more realistic international asset market structure and show that as soon as we depart from the single bond economy, we can no longer account for the consumption-real exchange anomaly. Our central result holds for a simple asset market structure in which two nominal bonds are traded across countries. We explore the role of demand shocks such as news shocks in generating meaningful market incompleteness. We show that only under specific settings news shocks can improve the performance of the model in matching the portfolio positions and consumption-real exchange rate correlations that we observe in the data.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1048.

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Date of creation: Apr 2011
Handle: RePEc:cep:cepdps:dp1048
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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