Asset Liquidity and International Portfolio Choice

Athanasios Geromichalos and Ina Simonovska

No 17331, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relatively more domestic assets. Consequently, agents have larger claims to domestic over foreign consumption. Moreover, foreign assets turn over faster than domestic assets because the former have desirable liquidity properties, but represent inferior saving tools. Our mechanism offers an answer to a long-standing puzzle in international finance: a positive relationship between consumption and asset home bias coupled with higher turnover rates of foreign over domestic assets.

JEL-codes: E44 F15 F36 G11 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
Note: IFM
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Citations: View citations in EconPapers (10)

Published as Geromichalos, A., and I. Simonovska (2014): “Asset Liquidity and International Portfolio Choice,” Journal of Economic Theory, 151(1), 342-380.

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Related works:
Journal Article: Asset liquidity and international portfolio choice (2014)
Working Paper: Asset Liquidity and International Portfolio Choice (2011)
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