International Portfolio Allocation under Model Uncertainty

Pierpaolo Benigno and Salvatore Nisticò

American Economic Journal: Macroeconomics, 2012, vol. 4, issue 1, 144-89

Abstract: This paper revisits an old argument, hedging real exchange rate risk, as an explanation of the international home bias in equity. In a dynamic model, the relevant risk to be hedged is the long-run risk as opposed to the short-run risk. Domestic equity is indeed a good hedge with respect to long-run real-exchange-rate risk. Two new frameworks are able to explain a large share of the observed US home bias: a model with Hansen-Sargent preferences in which agents fear model misspecification and a model with Epstein-Zin preferences. These two models are also immune to the risk-free rate puzzle. (JEL C58, F31, G11, G15)

JEL-codes: C58 F31 G11 G15 (search for similar items in EconPapers)
Date: 2012
Note: DOI: 10.1257/mac.4.1.144
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Citations: View citations in EconPapers (36)

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Working Paper: International Portfolio Allocation under Model Uncertainty (2009)
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