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

Akito Matsumoto

No 07/163, 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: Working Paper; Asset management; Business cycles; Financial integration; Investment; Risk management; Economic models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-upt
Date: 2007-07-17
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