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Portfolio Home Bias and External Habit Formation

Listed author(s):
  • Andreas Stathopoulos

    (University of Southern California)

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    This paper explores international portfolio choice in a multi-country, multi-good general equilibrium setting which features time-varying risk aversion generated by external habit formation. It is shown that time variation in conditional risk aversion generates time variation in the countries' relative consumption expenditure. As a result, financing equilibrium consumption entails hedging against adverse fluctuations in risk aversion. In equilibrium, an increase in home risk aversion tends to appreciate the home equity and depreciate the foreign equity, so each agent hedges by shifting her equity portfolio towards the home equity claim. Furthermore, the model is able to generate realistic asset price and exchange rate dynamics, satisfying a long-standing need of the general equilibrium literature in international finance.

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    File URL: https://economicdynamics.org/meetpapers/2012/paper_502.pdf
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    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 502.

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    Date of creation: 2012
    Handle: RePEc:red:sed012:502
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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