Cross-border portfolio diversification under trade linkages

Makram Khalil

Journal of Monetary Economics, 2019, vol. 104, issue C, 114-128

Abstract: Using the IMF CPIS data on cross-border financial assets, I find that the share of equity in a bilateral portfolio decreases with bilateral trade. Strengthening trade linkages is strongly related to rising holdings of foreign debt but not so to holdings of foreign equity. The results are rationalised by a model of international portfolios in which deepening trade integration increases the exposure of the household consumption basket to deteriorating terms of trade. With rising trade, a sufficiently risk averse representative agent therefore chooses to hold a larger amount of foreign bonds that are well suited to hedge this risk.

Keywords: Cross-border portfolio choice; Equity and debt; Two-country two-goods model; Coordinated Portfolio Investment Survey (CPIS) (search for similar items in EconPapers)
JEL-codes: F21 F36 F41 G11 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Cross-Border Portfolio Diversification under Trade Linkages (2017)
Working Paper: Cross-Border Portfolio Diversification under Trade Linkages (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:104:y:2019:i:c:p:114-128

DOI: 10.1016/j.jmoneco.2018.10.001

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