Portfolio allocation and international risk sharing

Benigno, Gianluca and Küçük-Tuger, Hande (2011) Portfolio allocation and international risk sharing. CEP Discussion Papers (CEPDP1048). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

Recent contributions have shown that it is possible to account for the so-called consumption-real exchange anomaly in models with goods market frictions where international asset trade is limited to a riskless bond. In this paper, we consider a more realistic international asset market structure and show that as soon as we depart from the single bond economy, we can no longer account for the consumption-real exchange anomaly. Our central result holds for a simple asset market structure in which two nominal bonds are traded across countries. We explore the role of demand shocks such as news shocks in generating meaningful market incompleteness. We show that only under specific settings news shocks can improve the performance of the model in matching the portfolio positions and consumption-real exchange rate correlations that we observe in the data.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2011 The Author(s)
Divisions:	Economics
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	F - International Economics > F3 - International Finance > F31 - Foreign Exchange F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Date Deposited:	22 Feb 2024 15:36
Last Modified:	14 Sep 2024 04:44
URI:	http://eprints.lse.ac.uk/id/eprint/121727

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