Goods Trade and International Equity Portfolios

Fabrice Collard (), Harris Dellas, Behzad Diba and Alan C. Stockman ()

No 13612, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that international trade in goods is the main determinant of international equity portfolios and offers a compelling -- theoretically and empirically -- resolution of the portfolio home bias puzzle. The model implies that investors can achieve full international risk diversification if the share of wealth invested in foreign equity matches their country's degree of openness (the imports to GDP share). The empirical evidence strongly supports this implication.

JEL-codes: F21 F3 (search for similar items in EconPapers)
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Date: 2007-11
Note: IFM ITI
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