EconPapers    
Economics at your fingertips  
 

The international diversification puzzle is not as bad as you think

Jonathan Heathcote and Fabrizio Perri

No 152, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: In the data country portfolios are heavily biased toward domestic assets. Standard one-good international macro models predict that, due to the presence of non-diversifiable labor income risk, country portfolios should be heavily biased toward foreign assets; this discrepancy constitute the international diversification puzzle. (Baxter and Jermann, 1997). We show that a simple extension of one-good models help reconcile theory and data. In particular we analytically solve for the equilibrium country portfolios in a two-country, two-goods model with non-diversifiable labor income and investment. In this set-up, consistently with the data, country portfolios contain a relatively small, but positive, share of foreign assets. The reason why international diversification is low is that terms of trade movements provide considerable insurance against country specific shocks and labor income risk (Cole and Obstfeld 1991, Acemoglu and Ventura, 2001). The reason why international diversification is positive is that foreign assets are crucial to share the financing of investment across countries. Finally in the model a country\92s share of foreign assets should depend on its import share and on its capital share. We show how this relation is qualitatively and quantitatively consistent with country portfolios in the cross section of OECD countries in the 1990s.

Keywords: home bias; international risk sharing (search for similar items in EconPapers)
JEL-codes: F36 F41 (search for similar items in EconPapers)
Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (62)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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 (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
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:red:sed004:152

Access Statistics for this paper

More papers in 2004 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann (chuichuiche@gmail.com).

 
Page updated 2025-03-31
Handle: RePEc:red:sed004:152