Discussion Paper Details

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Title: International Portfolios with Supply, Demand and Redistributive Shocks

Author(s): Nicolas Coeurdacier, Robert Kollmann and Philippe Martin

Publication Date: September 2007

Keyword(s): Equity home bias, International portfolios, International risk sharing and Valuation effects

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: This paper explains three key stylized facts observed in industrialized countries: 1) portfolio holdings are biased towards local equity; 2) international portfolios are long in foreign currency assets and short in domestic currency; 3) the depreciation of a country?s exchange rate is associated with a net external capital gain, i.e. with a positive wealth transfer from the rest of the world. We present a two-country, two-good model with trade in stocks and bonds, and three types of disturbances: shocks to endowments, to the relative demand for home vs. foreign goods, and to the distribution of income between labour and capital. With these shocks, optimal international portfolios are shown to be consistent with the stylized facts.

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Bibliographic Reference

Coeurdacier, N, Kollmann, R and Martin, P. 2007. 'International Portfolios with Supply, Demand and Redistributive Shocks'. London, Centre for Economic Policy Research.