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Title: Portfolio Allocation and International Risk Sharing

Author(s): Gianluca Benigno and Hande Küçük

Publication Date: February 2012

Keyword(s): Consumption-Real Exchange Rate anomaly, Incomplete Financial Markets, International Risk Sharing and Portfolio choice

Programme Area(s): International Macroeconomics

Abstract: We show that recent explanations of the consumption-real exchange rate anomaly which rely on goods and financial market frictions are not robust to introducing just one additional international asset. When portfolios are selected optimally, international trade in two nominal bonds implies a consumption-real exchange rate correlation that is too high compared to the data even when there are many shocks. Monetary policy specification plays a potentially important role for the degree of risk sharing provided by nominal bonds, both in the benchmark model with only tradable and non-tradable sector supply shocks and also in the model which allows for news or quality (i-pod) shocks.

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Bibliographic Reference

Benigno, G and Küçük, H. 2012. 'Portfolio Allocation and International Risk Sharing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8810