Working Paper: CEPR ID: DP5512
Authors: Robert Kollmann
Abstract: This paper analyses the determinants of international asset portfolios, using a neoclassical dynamic general equilibrium model with home bias in consumption. For plausible parameter values, the model explains the fact that typical investors hold most of their wealth in domestic assets (portfolio home bias). In the model, the current account balance (change in net foreign assets) is mainly driven by fluctuations in equity prices; the current account is predicted to be highly volatile and to exhibit low serial correlation; changes in a country's foreign equity assets and liabilities are predicted to be highly positively correlated. The paper constructs current account series that include external capital gains/losses, for 17 OECD economies. The behaviour of those series confirms the theoretical predictions.
Keywords: Consumption and Portfolio Home Bias; Current Account; International Portfolio Holdings
JEL Codes: F2; F3; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumption home bias (D12) | portfolio home bias (G11) |
| equity prices (G12) | current account balance (F32) |
| foreign equity assets and liabilities (G15) | current account positions (F32) |
| equity price fluctuations (G12) | current account dynamics (F32) |