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

  • Marta Arespa

    ()

    (CREB, Universitat de Barcelona.)

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.

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File URL: http://www.pcb.ub.edu/xreap/aplicacio/fitxers/XREAP2011-15.pdf
File Function: First version, 2011
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File URL: http://www.pcb.ub.edu/xreap/aplicacio/fitxers/XREAP2011-15.pdf
File Function: Revised version, 2011
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Paper provided by Xarxa de Referència en Economia Aplicada (XREAP) in its series Working Papers with number XREAP2011-15.

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Length: 40 pages
Date of creation: Oct 2011
Date of revision: Oct 2011
Handle: RePEc:xrp:wpaper:xreap2011-15
Contact details of provider: Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques i Empresarials, Universitat de Barcelona, c/ Tinent Coronel Valenzuela, 1-11, 08034 Barcelona
Phone: +34+934039653
Web page: http://www.pcb.ub.edu/xreap
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  1. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2007. "International Portfolios with Supply, Demand and Redistributive Shocks," NBER Working Papers 13424, National Bureau of Economic Research, Inc.
  2. Heathcote, Jonathan & Perri, Fabrizio, 2008. "The International Diversification Puzzle is Not as Bad as You Think," CEPR Discussion Papers 6982, C.E.P.R. Discussion Papers.
  3. Robert Kollmann, 2006. "A Dynamic Equilibrium Model of International Portfolio Holdings: Comment," Econometrica, Econometric Society, vol. 74(1), pages 269-273, 01.
  4. Nicolas Coeurdacier, 2006. "Do trade costs in goods market lead to home bias in equities?," 2006 Meeting Papers 111, Society for Economic Dynamics.
  5. Christophe Kamps, 2004. "New Estimates of Government Net Capital Stocks for 22 OECD Countries 1960-2001," IMF Working Papers 04/67, International Monetary Fund.
  6. Charles Engel & Akito Matsumoto, 2006. "Portfolio Choice in a Monetary Open-Economy DSGE Model," NBER Working Papers 12214, National Bureau of Economic Research, Inc.
  7. Coeurdacier, Nicolas & Guibaud, Stéphane, 2006. "International Portfolio Diversification Is Better Than You Think," ESSEC Working Papers DR 06013, ESSEC Research Center, ESSEC Business School.
  8. 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.
  9. repec:urv:wpaper:2072/169683 is not listed on IDEAS
  10. 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.
  11. Florin Bilbiie & Fabio Ghironi & Marc J. Melitz, 2005. "Business Cycles and Firm Dynamics," 2005 Meeting Papers 842, Society for Economic Dynamics.
  12. 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.
  13. 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.
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