IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Country Portfolios with Heterogeneous Pledgeability

In a two-country portfolio model with leverage constraints, I focus on private assets in order to understand how their behaviour can justify an expected excess return as well as the flight-to-safety observed in the data. The specific goal is to study how much these phenomena are explained by the fact that investors cannot always borrow the same amount of resources pledging domestic assets as pledging foreign collateral. Modeling the leverage constraints accordingly, I propose a methodology to deal with this heterogeneous pledgeability and solve for country portfolios. The central feature of this approach is that any idiosyncratic shocks generate an expected excess returns which compensate the current effects of the shock on the relative riskiness of local versus foreign collateral. The resulting portfolio solution shows that, in equilibrium, investors care for this risk and renounce to a part of the expected excess return - favouring current borrowing. The main consequences are: the home equity bias is smaller than in a model where assets are homogeneously pledgeable; the ex post dynamics of the relative premium paid on collateralized assets contribute to the cross-border transmission of shocks. Given these dynamics, idiosyncratic shocks to the pledgeability of local assets affect the value of external claims and liabilities of the country hit by the shock in such a way that its net foreign assets match those observed in the data during times of flight-to-safety.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP02-2012.pdf
Download Restriction: no

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 02-2012.

as
in new window

Length: 38 pages
Date of creation: 12 Feb 2012
Date of revision: 12 Feb 2012
Handle: RePEc:gii:giihei:heidwp02-2012
Contact details of provider: Postal: P.O. Box 36, 1211 Geneva 21
Phone: ++41 22 731 17 30
Fax: ++41 22 738 43 06
Web page: http://www.graduateinstitute.ch/economics
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers 2000516, Trinity College Dublin, Department of Economics.
  2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
  3. Baxter, M. & Jermann, U.J., 1993. "The International Diversification Puzzle is Worse than you Think," RCER Working Papers 350, University of Rochester - Center for Economic Research (RCER).
  4. Michael B. Devereux, 2010. "Leverage constraints and the international transmission of shocks," Globalization and Monetary Policy Institute Working Paper 45, Federal Reserve Bank of Dallas.
  5. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  6. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," NBER Working Papers 13768, National Bureau of Economic Research, Inc.
  7. Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2010. "Gross capital flows: Dynamics and crises," Economics Working Papers 1227, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2012.
  8. Cédric Tille & Eric van Wincoop, 2007. "International capital flows," Staff Reports 280, Federal Reserve Bank of New York.
  9. Anna Pavlova & Roberto Rigobon, 2007. "An Asset-Pricing View of External Adjustment," NBER Working Papers 13468, National Bureau of Economic Research, Inc.
  10. Enrique G. Mendoza, 2007. "Financial Integration, Financial Deepness and Global Imbalance," 2007 Meeting Papers 746, Society for Economic Dynamics.
  11. Alan Sutherland & Michael B Devereux, 2007. "Country Portfolio Dynamics," 2007 Meeting Papers 386, Society for Economic Dynamics.
  12. Aiyagari, S.R. & Gertler, M., 1998. ""Overreaction" of Asset Prices in General Equilibrium," Working Papers 98-25, C.V. Starr Center for Applied Economics, New York University.
  13. Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of 'Global Imbalances' and Low Interest Rates," CEPR Discussion Papers 5573, C.E.P.R. Discussion Papers.
  14. Nicolae G�rleanu & Lasse Heje Pedersen, 2011. "Margin-based Asset Pricing and Deviations from the Law of One Price," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1980-2022.
  15. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  16. repec:fth:starer:9825 is not listed on IDEAS
  17. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," The Institute for International Integration Studies Discussion Paper Series iiisdp124, IIIS.
  18. Bennett T. McCallum, 1998. "Solutions to Linear Rational Expectations Models: A Compact Exposition," NBER Technical Working Papers 0232, National Bureau of Economic Research, Inc.
  19. Aiyagari, S.R. & Gertler, M., 1998. ""Overreaction" of Asset Prices in General Equilibrium," Working Papers 98-25, C.V. Starr Center for Applied Economics, New York University.
  20. Martin D. D. Evans & Viktoria Hnatkovska, 2005. "Solving General Equilibrium Models with Incomplete Markets and Many Assets," NBER Technical Working Papers 0318, National Bureau of Economic Research, Inc.
  21. Giovanni Lombardo & Luca Dedola, 2010. "Financial Frictions, Financial Integration and the International Propagation of Shocks," 2010 Meeting Papers 288, Society for Economic Dynamics.
  22. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
  23. repec:tcd:wpaper:tep16 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:gii:giihei:heidwp02-2012. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria Sokolova)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.