International Risk Sharing and Portfolio Choice with Non-separable Preferences

Alan Sutherland () and Küçük, Hande
Authors registered in the RePEc Author Service: Hande Kucuk ()

No 10724, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper aims to account for the Backus-Smith puzzle in a two-country DSGE model with endogenous portfolio choice in bonds and equities. Utility is non-separable across consumption and leisure and across time. This model is shown to imply almost zero correlation between relative consumption and the real exchange rate while generating portfolio positions that broadly match the data. Furthermore, the cross-country correlation of consumption is lower than the correlation of output, which has previously been a difficult fact to match. Non-separable preferences are found to be crucial to generating these results but financial market structure plays only a minor role.

Keywords: Incomplete markets; international risk sharing; Backus-smith puzzle; Consumption-real exchange rate anomaly; Non-separable preferences; Portfolio choice (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-dge, nep-opm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: International Risk Sharing and Portfolio Choice with Non-separable Preferences (2015)
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