Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modeling that ...incorporate international portfolio choices in standard two-country general equilibrium models. We refer to this new literature as Open Economy Financial Macroeconomics. We focus on three broad classes of explanations: (i) hedging motives in frictionless financial markets (real exchange rate and nontradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), and (iii) informational frictions and behavioral biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on cross-border asset holdings across different types of assets: equities, bonds and bank lending and new micro data on institutional holdings of equity at the fund level. These data should inform macroeconomic modeling of the open economy and a growing literature of models of delegated investment.
Two of the main puzzles in international economics are the consumption and the portfolio home biases. We solve for international equity portfolios in a two-country/two-good stochastic equilibrium ...model with trade costs in goods markets. We show that introducing trade costs, as suggested by Obstfeld and Rogoff Obstfeld, M., Rogoff, K., 2000a. The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? NBER Macroeconomics Annual, 15, is not sufficient to explain these two puzzles simultaneously. On the contrary, we find that trade costs create a foreign bias in portfolios for reasonable parameter values. This result is robust to the addition of non-tradable goods for standard calibrations of the preferences.
We show that in an open-economy OLG model, the interaction between growth differentials and household credit constraints—more severe in fast-growing countries—can explain three prominent global ...trends: a divergence in private saving rates between advanced and emerging economies, large net capital outflows from the latter, and a sustained decline in the world interest rate. Micro-level evidence on the evolution of age-saving profiles in the US and China corroborates our mechanism. Quantitatively, our model explains about a third of the divergence in aggregate saving rates, and a significant portion of the variations in age-saving profiles across countries and over time.
Gravity models have been widely used to describe bilateral trade in goods. Portes and Rey Portes, R., Rey, H., 2005. The Determinants of Cross-Border Equity Flows. Journal of International Economics, ...65(2), 269–296. applied this framework to cross-border equity flows and found that distance, which proxies information asymmetries, is a surprisingly very large barrier to cross-border asset trade. We adopt a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings in a simultaneous gravity equations framework. Providing different instruments for both endogenous variables, we show that a 10% increase in bilateral trade raises bilateral asset holdings by 6% to 7%. The reverse causality is also significant, albeit smaller. Controlling for trade, the impact of distance on asset holdings is drastically reduced.
Despite the liberalization of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanations of equity home bias: transaction costs that impede ...international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation and international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuations in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows.
This paper analyzes the determinants of cross-border asset trade on cross-country data and a Swedish data set. We focus our analysis on the impact of the euro for the determinants of trade in bonds, ...equity and banking assets. With the help of a theoretical model, we disentangle the different effects that the euro may have on cross-border asset holdings for both euro zone countries and countries outside of the euro zone. We find evidence that the euro implies 1) a unilateral financial liberalization which makes it cheaper for all countries to buy euro zone assets. For bonds and equity holdings, this translates into approximately 14% and 17% lower transaction costs; 2) a preferential financial liberalization which on top of the previous effect lowers transaction costs inside the euro zone by approximately 17% and 10% for bonds and equity respectively; 3) a diversion effect due to the fact that lower transaction costs inside the euro zone entail euro countries to purchase less equity from outside the euro zone. Our empirical analysis also suggests that the elasticity of substitution between bonds inside the euro zone is three times higher than between bonds denominated in different currencies.
J. Japanese Int. Economies
23 (2) (2009) 90–113.
•Using global methods, welfare gains from financial integration in risky production economies are computed.•The framework accounts for gains from a more eficient capital allocation and gains from ...risk sharing.•Welfare gains are found small for capital scarce and risky emerging countries, at most 0.5% increase in permanent consumption.•Following integration, emerging countries import capital for efficiency motives before exporting it for self-insurance.
We revisit the debate on the benefits of financial integration in a two-country neoclassical growth model with aggregate uncertainty. The framework accounts simultaneously for gains from a more efficient capital allocation and gains from risk sharing—together with their interaction. Global numerical methods allow for meaningful welfare comparisons. Gains from integration are quantitatively small, even for riskier and capital scarce emerging economies. These countries import capital for efficiency reasons before exporting it for self-insurance, leading to capital flows and growth reversals along the transition. This opens the door to richer empirical implications than previously considered in the literature.
The One-Child Policy and Household Saving Choukhmane, Taha; Coeurdacier, Nicolas; Jin, Keyu
Journal of the European Economic Association,
06/2023, Letnik:
21, Številka:
3
Journal Article
Recenzirano
Odprti dostop
Abstract
We investigate whether the “one-child policy” has contributed to the rise in China’s household saving rate and human capital in recent decades. In a life-cycle model with intergenerational ...transfers and human capital accumulation, fertility restrictions lower expected old-age support coming from children—inducing parents to raise saving and education investment in their offspring. Quantitatively, the policy can account for at least 30% of the rise in aggregate saving. Using the birth of twins under the policy as an empirical out-of-sample check to the theory, we find that quantitative estimates on saving and education decisions line up well with micro-data.
This paper presents a model of international portfolios with real exchange rate and non-financial risks that account for observed levels of equity home bias. Bonds matter: in equilibrium, investors ...structure their bond portfolio to hedge real exchange rate risks. Equity home bias arises when non-financial income risk is negatively correlated with equity returns, after controlling for bond returns. Our framework allows us to derive equilibrium bond and equity portfolios in terms of directly measurable hedge ratios. An empirical application to G-7 countries finds strong empirical support for the theory. We are able to account for a significant share of the equity home bias and obtain an aggregate currency exposure of bond portfolios comparable to the data.
•The paper develops a model of international portfolio choice with bonds and equity.•Portfolios are structured to hedge non-financial income and real exchange rate risk.•Optimal portfolios are expressed as a function of measurable hedge ratios.•Hedge ratios are estimated using data on financial and non-financial returns.•Predicted equity portfolios have a significant degree of home bias.
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