DP6482 International Portfolios with Supply, Demand and Redistributive Shocks

Author(s): Nicolas Coeurdacier, Robert Kollmann, Philippe Martin
Publication Date: September 2007
Keyword(s): Equity home bias, International portfolios, International risk sharing, Valuation effects
JEL(s): F30, F41, G11
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6482

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.