International Diversification in Debt vs Equity
Working Papers from Georgetown University, Department of Economics
Can a standard open economy macro model generate realistic international diversification in debt AND equity? We address this question by solving for steady-state portfolios in a two-country, two-good DSGE endowment model with consumption home bias. We compare two different asset trading regimes. In the first, households in each country trade equity claims on their underlying stochastic endowments; in the second, households trade locally-denominated bonds. We derive locally accurate closed-form solutions for steady-state portfolios under each regime. The model can predict realistic home equity bias and bond diversification if the intratemporal elasticity of substitution between home and foreign goods is sufficiently low. However, for commonly used parameter values, the standard two-good model understates bond diversification and overstates equity diversification.
Keywords: Home bias; international diversification puzzle; portfolio choice; open economy macroeconomics; DSGE models (search for similar items in EconPapers)
JEL-codes: F36 F41 G11 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
http://www8.georgetown.edu/departments/economics/pdf/901.pdf Full text (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:geo:guwopa:gueconwpa~09-09-01
Ordering information: This working paper can be ordered from
Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
Access Statistics for this paper
More papers in Working Papers from Georgetown University, Department of Economics Georgetown University Department of Economics Washington, DC 20057-1036.
Series data maintained by Marcia Suss ().