Do trade costs in goods market lead to home bias in equities?

Nicolas Coeurdacier

Journal of International Economics, 2009, vol. 77, issue 1, pages 86-100

Abstract: Two of the main puzzles in international economics are the consumption and the portfolio home biases. We solve for international equity portfolios in a two-country/two-good stochastic equilibrium model with trade costs in goods markets. We show that introducing trade costs, as suggested by Obstfeld and Rogoff [Obstfeld, M., Rogoff, K., 2000a. The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? NBER Macroeconomics Annual, 15], is not sufficient to explain these two puzzles simultaneously. On the contrary, we find that trade costs create a foreign bias in portfolios for reasonable parameter values. This result is robust to the addition of non-tradable goods for standard calibrations of the preferences.

Keywords: Trade; costs; Home; bias; Portfolio; choice; International; macroeconomics (search for similar items in EconPapers)
Date: 2009
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Persistent link: http://EconPapers.repec.org/RePEc:eee:inecon:v:77:y:2009:i:1:p:86-100

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