Michaelides, Alexander (2001) International portfolio choice: liquidity constraints and the home equity bias puzzle. 3066. Centre for Economic Policy Research, London, UK.Full text not available from this repository.
This Paper solves for optimal international portfolio choice in the presence of liquidity constraints and undiversifiable labour income risk. Optimal portfolios are internationally diversified while positive correlation between domestic stock market returns and permanent labour income shocks can worsen the home equity bias puzzle. Nevertheless, either small costs associated with investing abroad or a slightly positive domestic to foreign equity premium differential are sufficient to either deter households from participating in a foreign market or generate a substantial bias for home equities. The benefits of international diversification are limited because consumption fluctuations can be smoothed with a small amount of buffer stock saving, while exchange rate risk makes foreign investments less appealing to risk averse investors.
|Item Type:||Monograph (Discussion Paper)|
|Additional Information:||© 2001 Alex Michaelides|
|Uncontrolled Keywords:||home equity bias, information costs, international portfolio choice and liquidity constraints|
|Library of Congress subject classification:||H Social Sciences > HG Finance|
|Journal of Economic Literature Classification System:||E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E20 - General
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
|Sets:||Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Economics
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