The Role of Portfolio Constraints in the International Propagation of Shocks

Roberto Rigobon and Anna Pavlova

No 6647, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the comovement among stock prices and among exchange rates in a three-good three-country Centre-Periphery dynamic equilibrium model in which the Centre?s agents face portfolio constraints. We characterize equilibrium in closed form for a broad class of portfolio constraints, solving for stock prices, terms of trade, and portfolio holdings. We show that portfolio constraints generate wealth transfers between the Periphery countries and the Centre, which increase the comovement of the stock prices across the Periphery. We associate this excess comovement caused by portfolio constraints with the phenomenon known as contagion. The model generates predictions consistent with other important empirical results such as amplification and flight-to-quality effects.

Keywords: Asset pricing; Contagion; International finance; Portfolio constraints; Terms of trade; Wealth transfer (search for similar items in EconPapers)
JEL-codes: F31 F36 G12 G15 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-cba and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (108)

Downloads: (external link)
https://cepr.org/publications/DP6647 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The Role of Portfolio Constraints in the International Propagation of Shocks (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:cpr:ceprdp:6647

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6647

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().