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Portfolio choice analysis in a multi-country macro model

Chenyue Hu

Journal of Economic Dynamics and Control, 2025, vol. 170, issue C

Abstract: This paper examines portfolio choice in a dynamic stochastic general equilibrium model with trade and financial linkages across 43 countries. I conduct comparative statics analysis with this structural model to disentangle potential mechanisms of global financial allocation, including risk hedging, risk diversification, risk sharing, and financial friction. For asset home bias, the model predicts that risk hedging is less essential in a multi-country than in a two-country setting. For bilateral asset positions, the model implies that variations in financial friction and asset covariance are major determinants of observed cross-country portfolios. Meanwhile, bilateral financial linkages strongly covary with trade linkages across countries. Comparative statics suggests that this covariance is mainly driven by the high correlation of frictions across the two channels of globalization.

Keywords: Portfolio choice in DSGE framework; Asset home bias in open economy macro models; Macro implications of finance and trade (search for similar items in EconPapers)
JEL-codes: F30 F41 F62 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:170:y:2025:i:c:s0165188924002136

DOI: 10.1016/j.jedc.2024.105021

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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