Relative factor endowments and international portfolio choice

Alejandro Cunat and Christian Fons-Rosen

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper presents a model of international portfolio choice based on the pattern of comparative advantage in goods trade. Countries have varying degrees of similarity in their factor endowment ratios, and are subject to aggregate productivity shocks. Risk averse consumers can insure against these shocks by investing their wealth at home and abroad. The change in relative prices after a positive shock in a particular country provides insurance to countries that have dissimilar factor endowment ratios, but is bad news for countries with similar factor endowment ratios, since their incomes will worsen. Therefore countries with similar comparative advantages have a stronger incentive to invest in one another for insurance purposes than countries with dissimilar comparative advantages. Empirical evidence linking bilateral international investment positions to a proxy for relative factor endowments supports our theory: the similarity of host and source countries in their relative capital-labor ratios has a positive effect on the source country’s investment position in the host country. The effect of similarity is enhanced by the size of host countries as predicted by the theory.

Keywords: international portfolio equity investment; gravity equation; factor endowments (search for similar items in EconPapers)
JEL-codes: F21 F34 G11 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2008-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://eprints.lse.ac.uk/19562/ Open access version. (application/pdf)

Related works:
Journal Article: RELATIVE FACTOR ENDOWMENTS AND INTERNATIONAL PORTFOLIO CHOICE (2013)
Working Paper: Relative Factor Endowments and International Portfolio Choice (2008)
Working Paper: Relative Factor Endowments and International Portfolio Choice (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:19562

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().