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A New Open Economy Macroeconomic Model with Endogenous Portfolio Diversifi cation and Firms Entry

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  • Marta Arespa

    () (CREB, Universitat de Barcelona.)

Abstract

This paper provides a new benchmark for the analysis of the international diversi cation puzzle in a tractable new open economy macroeconomic model. Building on Cole and Obstfeld (1991) and Heathcote and Perri (2009), this model speci es an equilibrium model of perfect risk sharing in incomplete markets, with endogenous portfolios and number of varieties. Equity home bias may not be a puzzle but a perfectly optimal allocation for hedging risk. In contrast to previous work, the model shows that: (i) optimal international portfolio diversi cation is driven by home bias in capital goods, independently of home bias in consumption, and by the share of income accruing to labour. The model explains reasonably well the recent patterns of portfolio allocations in developed economies; and (ii) optimal portfolio shares are independent of market dynamics.

Suggested Citation

  • Marta Arespa, 2011. "A New Open Economy Macroeconomic Model with Endogenous Portfolio Diversifi cation and Firms Entry," Working Papers XREAP2011-15, Xarxa de Referència en Economia Aplicada (XREAP), revised Oct 2011.
  • Handle: RePEc:xrp:wpaper:xreap2011-15
    as

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    File URL: http://www.xreap.cat/RePEc/xrp/pdf/XREAP2011-15.pdf
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    File URL: http://www.xreap.cat/RePEc/xrp/pdf/XREAP2011-15.pdf
    File Function: Revised version, 2011
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    References listed on IDEAS

    as
    1. Jonathan Heathcote & Fabrizio Perri, 2013. "The International Diversification Puzzle Is Not as Bad as You Think," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1108-1159.
    2. Coeurdacier, Nicolas, 2009. "Do trade costs in goods market lead to home bias in equities?," Journal of International Economics, Elsevier, vol. 77(1), pages 86-100, February.
    3. Xosé-Luís Varela-Irimia, 2014. "Age effects, unobserved characteristics and hedonic price indexes: The Spanish car market in the 1990s," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(4), pages 419-455, November.
    4. Robert Kollmann, 2006. "A Dynamic Equilibrium Model of International Portfolio Holdings: Comment," Econometrica, Econometric Society, vol. 74(1), pages 269-273, January.
    5. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2009. "International Portfolios with Supply, Demand and Redistributive Shocks," NBER Chapters,in: NBER International Seminar on Macroeconomics 2007, pages 231-263 National Bureau of Economic Research, Inc.
    6. Akito Matsumoto & Charles Engel, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund.
    7. Juan Luís Jiménez & Jordi Perdiguero, 2009. "(No)competition in the Spanish retailing gasoline market: a variance filter approach," Working Papers XREAP2009-05, Xarxa de Referència en Economia Aplicada (XREAP), revised May 2009.
    8. Hnatkovska, Viktoria, 2010. "Home bias and high turnover: Dynamic portfolio choice with incomplete markets," Journal of International Economics, Elsevier, vol. 80(1), pages 113-128, January.
    9. Florin Bilbiie & Fabio Ghironi & Marc J. Melitz, 2005. "Business Cycles and Firm Dynamics," 2005 Meeting Papers 842, Society for Economic Dynamics.
    10. Christophe Kamps, 2006. "New Estimates of Government Net Capital Stocks for 22 OECD Countries, 1960-2001," IMF Staff Papers, Palgrave Macmillan, vol. 53(1), pages 1-6.
    11. Coeurdacier, Nicolas & Guibaud, Stéphane, 2011. "International portfolio diversification is better than you think," Journal of International Money and Finance, Elsevier, vol. 30(2), pages 289-308, March.
    12. Mariam Camarero & Josep Lluis Carrion Silvestre & Cecilio Tamarit, 2006. "New evidence of the real interest rate parity for OECD countries using panel unit root tests with breaks," Working Papers in Economics 159, Universitat de Barcelona. Espai de Recerca en Economia.
    13. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 97-109.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Subsidies; Home bias; equity puzzle; New open economy macroeconomics; NOEM; extensive margin.;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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