International capital markets with interdependent preferences: Theory and empirical evidence

Giuliano Curatola and Ilya Dergunov

Journal of Economic Behavior & Organization, 2023, vol. 212, issue C, 403-421

Abstract: We propose a two-country model in which preferences change endogenously as a function of the popularity of traded goods. In equilibrium, expected returns and return volatility vary over time, agents prefer popular goods, and their portfolios are biased toward the country that produces the preferred goods. A home bias arises because home equity offers a better investment opportunity for hedging against changes in preference. The dependence of state prices on time-varying popularity reduces the cross-country correlation of consumption growth. These results do not hold when the preferences are constant. The comparison between empirical impulse response functions and those implied by the model supports our theory.

Keywords: Asset pricing; General equilibrium; Heterogeneous agents; Interdependent preferences; Portfolio choice (search for similar items in EconPapers)
JEL-codes: F21 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:212:y:2023:i:c:p:403-421

DOI: 10.1016/j.jebo.2023.05.045

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