Working Paper: CEPR ID: DP6991
Authors: Nicolas Coeurdacier
Abstract: Two of the main puzzles in international economics are the consumption and the portfolio home biases. We solve for international equity portfolios in a two-country/two-good stochastic equilibrium model with trade costs in goods markets. We show that introducing trade costs, as suggested by Obstfeld and Rogoff (2000), is not sufficient to explain these two puzzles simultaneously. On the contrary, we find that trade costs create a foreign bias in portfolios for reasonable parameter values. This result is robust to the addition of non-tradable goods for standard calibrations of the preferences.
Keywords: home bias; portfolio choice; trade costs
JEL Codes: F30; F36; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade costs in goods markets (F16) | foreign bias in portfolios (G15) |
| home output (R21) | home consumption (D10) |
| home consumption (D10) | portfolio choices (G11) |
| trade costs worsen home bias in portfolios (F12) | foreign bias in portfolios (G15) |