Asset Liquidity and International Portfolio Choice
We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relatively more domestic assets. Consequently, agents have larger claims to domestic over foreign consumption. Moreover, foreign assets turn over faster than domestic assets because the former have desirable liquidity properties, but represent inferior saving tools. Our mechanism offers an answer to a long-standing puzzle in international finance: a positive relationship between consumption and asset home bias coupled with higher turnover rates of foreign over domestic assets.
|Date of creation:||Aug 2011|
|Date of revision:|
|Publication status:||published as Geromichalos, A., and I. Simonovska (2014): “Asset Liquidity and International Portfolio Choice,” Journal of Economic Theory, 151(1), 342-380.|
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