The international diversification puzzle is not as bad as you think

Jonathan Heathcote and Fabrizio Perri

No 472, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: In one-good international macro models with nondiversifiable labor income risk, country portfolios are heavily biased toward foreign assets. The fact that the opposite pattern of diversification is observed empirically constitutes the international diversification puzzle. This paper embeds a portfolio choice decision in a two-country, two-good version of the stochastic growth model. In this environment, which is a workhorse for international business cycle research, equilibrium country portfolios can be characterized in closed form. Portfolios are biased toward domestic assets, as in the data. Home bias arises because endogenous international relative price uctuations make domestic assets a good hedge against labor income risk. Evidence from developed economies in recent years is qualitatively and quantitatively consistent with the mechanisms highlighted by the theory. keywords: Country portfolios, International business cycles, Home bias jel classification codes : F36, F41

Date: 2013
New Economics Papers: this item is included in nep-dge and nep-opm
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Citations: View citations in EconPapers (101)

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Related works:
Journal Article: The International Diversification Puzzle Is Not as Bad as You Think (2013)
Working Paper: The International Diversification Puzzle is Not as Bad as You Think (2008)
Working Paper: The international diversification puzzle is not as bad as you think (2007)
Working Paper: The International Diversification Puzzle Is Not as Bad as You Think (2007)
Working Paper: The International Diversification Puzzle Is Not As Bad As You Think (2007)
Working Paper: The international diversification puzzle is not as bad as you think (2004)
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