Working Paper: CEPR ID: DP6482
Authors: Nicolas Coeurdacier; Robert Kollmann; Philippe Martin
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.
Keywords: equity; home bias; international portfolios; international risk sharing; valuation effects
JEL Codes: F30; F41; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| redistributive shocks + supply and demand shocks (E39) | equity home bias (G12) |
| country's depreciation of exchange rate (F31) | net external capital gain (F21) |
| optimal portfolio choices (given shocks) (G11) | long positions in foreign currency bonds (G15) |
| variations in exchange rates and asset returns (F31) | significant wealth transfers between countries (H87) |