Bilateral Trade, Openness and Asset Holdings

Alexandra Peter

No 21/2010, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: This paper analyzes the relationship between bilateral trade flows, trade openness, and asset holdings in a three-country stochastic general equilibrium model. The threecountry model set-up enables me to disentangle and separate the effects bilateral trade flows and trade openness have on bilateral portfolio patterns. I find that both factors independently influence bilateral asset holdings. Higher bilateral trade as well as higher trade openness lead to a higher bilateral foreign asset position. Furthermore, the two factors show an interaction effect, where increasing trade openness diminishes the influence of bilateral trade flows on asset holdings. I provide supporting empirical evidence for these theoretical findings using a data set on the geographical composition of international portfolio holdings.

Keywords: International Portfolio Holdings; Bilateral Trade Flows; Trade Openness (search for similar items in EconPapers)
JEL-codes: F10 F30 F41 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bonedp:212010

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