EconPapers    
Economics at your fingertips  
 

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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (89) Track citations by RSS feed

Downloads: (external link)
https://repec.unibocconi.it/igier/igi/wp/2013/472.pdf (application/pdf)

Related works:
Journal Article: The International Diversification Puzzle Is Not as Bad as You Think (2013) Downloads
Working Paper: The International Diversification Puzzle is Not as Bad as You Think (2008) Downloads
Working Paper: The international diversification puzzle is not as bad as you think (2007) Downloads
Working Paper: The International Diversification Puzzle Is Not as Bad as You Think (2007) Downloads
Working Paper: The International Diversification Puzzle Is Not As Bad As You Think (2007) Downloads
Working Paper: The international diversification puzzle is not as bad as you think (2004)
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:igi:igierp:472

Ordering information: This working paper can be ordered from
https://repec.unibocconi.it/igier/igi/

Access Statistics for this paper

More papers in Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University via Rontgen, 1 - 20136 Milano (Italy).
Bibliographic data for series maintained by ().

 
Page updated 2022-08-08
Handle: RePEc:igi:igierp:472