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Portfolio Allocation and International Risk Sharing

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  • Benigno, Gianluca
  • Küçük, Hande

Abstract

We show that recent explanations of the consumption-real exchange rate anomaly which rely on goods and financial market frictions are not robust to introducing just one additional international asset. When portfolios are selected optimally, international trade in two nominal bonds implies a consumption-real exchange rate correlation that is too high compared to the data even when there are many shocks. Monetary policy specification plays a potentially important role for the degree of risk sharing provided by nominal bonds, both in the benchmark model with only tradable and non-tradable sector supply shocks and also in the model which allows for news or quality (i-pod) shocks.

Suggested Citation

  • Benigno, Gianluca & Küçük, Hande, 2012. "Portfolio Allocation and International Risk Sharing," CEPR Discussion Papers 8810, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8810
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2014. "Fiscal Devaluations," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 725-760.
    2. Karabarbounis, Loukas, 2010. "Labor wedges and open economy puzzles," MPRA Paper 31370, University Library of Munich, Germany.
    3. Devereux, Michael B. & Kollmann, Robert, 2012. "International Risk Sharing," MPRA Paper 70129, University Library of Munich, Germany.
    4. Hande Kucuk & Alan Sutherland, 2015. "International Risk Sharing and Portfolio Choice with Non-separable Preferences," Working Papers 1517, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Donadelli, Michael & Paradiso, Antonio, 2014. "Does financial integration affect real exchange rate volatility and cross-country equity market returns correlation?," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 206-220.
    6. Matthew Canzoneri & Robert Cumby & Behzad Diba, 2013. "Addressing International Empirical Puzzles: the Liquidity of Bonds," Open Economies Review, Springer, vol. 24(2), pages 197-215, April.
    7. Akkoyun, Hüseyin Çağrı & Arslan, Yavuz & Kılınç, Mustafa, 2017. "Risk sharing and real exchange rates: The role of non-tradable sector and trend shocks," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 232-248.
    8. De Paoli, Bianca & Küçük, Hande, 2015. "News shocks, monetary policy, and foreign currency positions," Staff Reports 750, Federal Reserve Bank of New York.
    9. Caporale, Guglielmo Maria & Donadelli, Michael & Varani, Alessia, 2015. "International capital markets structure, preferences and puzzles: A “US–China World”," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 85-99.

    More about this item

    Keywords

    Consumption-Real Exchange Rate anomaly; Incomplete Financial Markets; International Risk Sharing; Portfolio choice;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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