International Portfolio Diversification and the Structure of Global Production

Joseph Steinberg

Review of Economic Dynamics, 2018, vol. 29, 195-219

Abstract: In recent decades, country portfolio home bias has fallen in advanced economies but not in emerging economies. I use a dynamic general equilibrium model to show that changes in the distribution of global production and absorption explain this pattern. For advanced economies, whose share of world output fell as their trade openness rose, the model predicts an unambiguous drop in home bias. By contrast, emerging economies' growth in both size and trade openness have opposing implications for portfolios. To quantify these forces I calibrate the model to real and counterfactual input-output tables. Jointly, changes in the global production structure account for much of the decline in home bias in advanced economies and lack thereof in emerging economies. Country size and trade openness account for most of this effect. Consistent with theory, the increase in the intermediate share of trade had little impact. (Copyright: Elsevier)

Keywords: Country portfolios; International portfolio diversification; Production structure (search for similar items in EconPapers)
JEL-codes: F36 F41 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (9)

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DOI: 10.1016/j.red.2018.01.001

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