Working Paper: NBER ID: w13424
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 labor and capital. With these shocks, optimal international portfolios are shown to be consistent with the stylized facts.
Keywords: International Portfolios; Supply Shocks; Demand Shocks; Redistributive Shocks
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 (H23) | preference for holding local equity (G19) |
| preference for holding local equity (G19) | home bias (F23) |
| negative relative demand shock for home goods (D12) | bond portfolio short in home good bonds and long in foreign good bonds (G15) |
| bond portfolio short in home good bonds and long in foreign good bonds (G15) | external capital gain for the household (G59) |
| external capital gain for the household (G59) | increased imports and stabilization of consumption (E20) |
| depreciation of real exchange rate (F31) | positive wealth transfer (G51) |