Working Paper: NBER ID: w13173
Authors: Pierpaolo Benigno
Abstract: A dynamic model of consumption and portfolio decisions is analyzed in which agents seek robust choices against some misspecification of the model probability distribution. This near-rational environment can at the same time explain an imperfect international portfolio diversification and break the link between cross-country consumption correlation and real exchange rate as it is usually implied by standard preference specifications. Portfolio decisions imply moment restrictions on asset prices that are useful to extract information on the degree of near-rationality present in the data.
Keywords: Portfolio Choices; Near Rationality; International Finance; Home Bias; Backus-Smith Anomaly
JEL Codes: F41; G11; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| news about real exchange rate appreciation (F31) | preference for domestic assets (G15) |
| fears of model misspecification (C50) | stochastic discount factor (D15) |
| stochastic discount factor (D15) | optimal portfolio allocations (G11) |
| near-rationality (D01) | portfolio choices (G11) |
| portfolio choices (G11) | home bias (F23) |