The Role of Nonseparable Utility and Nontradeables in International Business Cycles and Portfolio Choice

Akito Matsumoto

No 2007/163, IMF Working Papers from International Monetary Fund

Abstract: This paper analyzes the role of nonseparable utility and nontradables in business cycles and portfolio choice. I find that nonseparability in utility can change the portfolio choice significantly. Unlike previous results in literature, the optimal portfolio of the traded-good sector equities is no longer a well diversified portfolio and becomes sensitive to parameter values. As a result, the model often generates extreme home bias or anti-home bias portfolios implying that some frictions in asset markets, which prevent agents from holding these extreme portfolios, can explain the lack of international risk sharing.

Keywords: WP; optimal portfolio; business cycle (search for similar items in EconPapers)
Pages: 32
Date: 2007-07-01
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Citations: View citations in EconPapers (27)

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