Portfolio Allocation and International Risk Sharing

Gianluca Benigno and Hande Kucuk ()

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Recent contributions have shown that it is possible to account for the so-called consumption-real exchange anomaly in models with goods market frictions where international asset trade is limited to a riskless bond. In this paper, we consider a more realistic international asset market structure and show that as soon as we depart from the single bond economy, we can no longer account for the consumption-real exchange anomaly. Our central result holds for a simple asset market structure in which two nominal bonds are traded across countries. We explore the role of demand shocks such as news shocks in generating meaningful market incompleteness. We show that only under specific settings news shocks can improve the performance of the model in matching the portfolio positions and consumption-real exchange rate correlations that we observe in the data.

Keywords: Portfolio choice; incomplete financial markets; international risk sharing; consumption-real exchange rate anomaly (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-cba, nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Portfolio allocation and international risk sharing (2012)
Journal Article: Portfolio allocation and international risk sharing (2012)
Working Paper: Portfolio Allocation and International Risk Sharing (2012)
Working Paper: Portfolio allocation and international risk sharing (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp1048

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