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International Portfolios: A Comparison of Solution Methods

Author

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  • Katrin Rabitsch

    (Department of Economics, Vienna University of Economics and Business)

  • Serhiy Stepanchuk

    (École Polytechnique Fédérale de Lausanne)

  • Viktor Tsyrennikov

    (Cornell University)

Abstract

We compare the performance of the perturbation-based (local) portfolio solution method of Devereux and Sutherland (2010a, 2011) with a global solution method. We find that the local method performs very well when the model is designed to capture stylized macroeconomic facts and countries/agents are symmetric, i.e. when the latter have similar size, face similar risks and trade assets with similar risk properties. It performs less satisfactory when the agents engaged in financial trade are asymmetric. The global solution method performs substantially better when the model is parameterized to match the observed equity premium, a key stylized finance fact.

Suggested Citation

  • Katrin Rabitsch & Serhiy Stepanchuk & Viktor Tsyrennikov, 2014. "International Portfolios: A Comparison of Solution Methods," Department of Economics Working Papers wuwp159, Vienna University of Economics and Business, Department of Economics.
    • Handle: RePEc:wiw:wiwwuw:wuwp159
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    More about this item

    Keywords

    Country Portfolios; Solution Methods;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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