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Portfolio Choices with Near Rational Agents: A Solution of Some International-Finance Puzzles

  • Pierpaolo Benigno

A dynamic model of consumption and portfolio decisions is analyzed in which agents seek robust choices against some misspecification of the model probability distribution. This near-rational environment can at the same time explain an imperfect international portfolio diversification and break the link between cross-country consumption correlation and real exchange rate as it is usually implied by standard preference specifications. Portfolio decisions imply moment restrictions on asset prices that are useful to extract information on the degree of near-rationality present in the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13173.

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Date of creation: Jun 2007
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Handle: RePEc:nbr:nberwo:13173
Note: AP IFM
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  1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Jonathan Heathcote & Fabrizio Perri, 2007. "The International Diversification Puzzle Is Not As Bad As You Think," NBER Working Papers 13483, National Bureau of Economic Research, Inc.
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  8. Michael B. Devereux & Alan Sutherland, 2007. "Solving for Country Portfolios in Open Economy Macro Models," Working Papers 162007, Hong Kong Institute for Monetary Research.
  9. Martin J Osborne & Ariel Rubinstein, 2009. "A Course in Game Theory," Levine's Bibliography 814577000000000225, UCLA Department of Economics.
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  12. Charles Engel & Akito Matsumoto, 2006. "Portfolio Choice in a Monetary Open-Economy DSGE Model," NBER Working Papers 12214, National Bureau of Economic Research, Inc.
  13. Raman Uppal & Tan Wang, 2003. "Model Misspecification and Underdiversification," Journal of Finance, American Finance Association, vol. 58(6), pages 2465-2486, December.
  14. Narayana R. Kocherlakota & Luigi Pistaferri, 2006. "Household Heterogeneity and Real Exchange Rates," Levine's Bibliography 122247000000001275, UCLA Department of Economics.
  15. Maenhout, Pascal J., 2006. "Robust portfolio rules and detection-error probabilities for a mean-reverting risk premium," Journal of Economic Theory, Elsevier, vol. 128(1), pages 136-163, May.
  16. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
  17. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
  18. Larry G. Epstein & JianJun Miao, 2001. "A Two-Person Dynamic Equilibrium under Ambiguity," RCER Working Papers 478, University of Rochester - Center for Economic Research (RCER).
  19. Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 951-983.
  20. Uppal, Raman, 1993. " A General Equilibrium Model of International Portfolio Choice," Journal of Finance, American Finance Association, vol. 48(2), pages 529-53, June.
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