IDEAS home Printed from https://ideas.repec.org/a/eee/inecon/v96y2015i1p212-226.html
   My bibliography  Save this article

International equity and bond positions in a DSGE model with variety risk in consumption

Author

Listed:
  • Hamano, Masashige

Abstract

This paper analyzes equity and bond positions in a two-country Dynamic Stochastic General Equilibrium model where the number of varieties, i.e., the extensive margins of products available to consumers, is endogenously determined. Fluctuations in the welfare-based real exchange rate, including those in the number of varieties, matter to international consumption risk sharing. We investigate the implication of such “variety risk” for the optimal portfolio choice and show that the variety risk generates home-biased equity positions, strengthening those obtained with the standard model in the literature. We also find preliminary empirical support for the mechanism.

Suggested Citation

  • Hamano, Masashige, 2015. "International equity and bond positions in a DSGE model with variety risk in consumption," Journal of International Economics, Elsevier, vol. 96(1), pages 212-226.
    • Handle: RePEc:eee:inecon:v:96:y:2015:i:1:p:212-226
    DOI: 10.1016/j.jinteco.2014.12.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022199614001470
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jinteco.2014.12.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jonathan Heathcote & Fabrizio Perri, 2013. "The International Diversification Puzzle Is Not as Bad as You Think," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1108-1159.
    2. Charles Engel & Akito Matsumoto, 2009. "The International Diversification Puzzle When Goods Prices Are Sticky: It's Really about Exchange-Rate Hedging, Not Equity Portfolios," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 155-188, July.
    3. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    4. Martin, Philippe & Rey, Helene, 2004. "Financial super-markets: size matters for asset trade," Journal of International Economics, Elsevier, vol. 64(2), pages 335-361, December.
    5. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    6. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
    7. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 865-915.
    8. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
    9. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 299-353, National Bureau of Economic Research, Inc.
    10. Gian Maria Milesi-Ferretti, & Philip R. Lane, 2003. "International Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp03, IIIS.
    11. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    12. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2009. "International Portfolios with Supply, Demand, and Redistributive Shocks," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 231-263, National Bureau of Economic Research, Inc.
    13. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    14. Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.
    15. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    16. Coeurdacier, Nicolas, 2009. "Do trade costs in goods market lead to home bias in equities?," Journal of International Economics, Elsevier, vol. 77(1), pages 86-100, February.
    17. Ben S. Bernanke & Kenneth S. Rogoff (ed.), 2001. "NBER Macroeconomics Annual 2000," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262523140, December.
    18. Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2007. "Productivity, terms of trade and the `home market effect'," Journal of International Economics, Elsevier, vol. 73(1), pages 99-127, September.
    19. Coeurdacier, Nicolas & Gourinchas, Pierre-Olivier, 2016. "When bonds matter: Home bias in goods and assets," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 119-137.
    20. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
    21. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 541-585.
    22. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "A Global Perspective on External Positions," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 67-102, National Bureau of Economic Research, Inc.
    23. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g7084aa4m is not listed on IDEAS
    24. Fabrice Collard & Harris Dellas & Behzad Diba & Alan Stockman, 2007. "Goods Trade and International Equity Portfolios," NBER Working Papers 13612, National Bureau of Economic Research, Inc.
    25. Devereux, Michael B. & Sutherland, Alan, 2010. "Valuation effects and the dynamics of net external assets," Journal of International Economics, Elsevier, vol. 80(1), pages 129-143, January.
    26. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, vol. 80(2), pages 157-175, March.
    27. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    28. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    29. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July.
    30. Baxter, Marianne & Jermann, Urban J, 1997. "The International Diversification Puzzle Is Worse Than You Think," American Economic Review, American Economic Association, vol. 87(1), pages 170-180, March.
    31. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 26-46.
    32. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    33. Piet Sercu & Rosanne Vanpée, 2008. "Estimating the Costs of International Equity Investments," Review of Finance, European Finance Association, vol. 12(4), pages 587-634.
    34. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
    35. Michael B. Devereux & Alan Sutherland, 2011. "Country Portfolios In Open Economy Macro‐Models," Journal of the European Economic Association, European Economic Association, vol. 9(2), pages 337-369, April.
    36. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-775, August.
    37. Giancarlo Corsetti & Philippe Martin & Paolo Pesenti, 2008. "Varieties and the Transfer Problem: The Extensive Margin of Current Account Adjustment," RSCAS Working Papers 2008/01, European University Institute.
    38. Vahagn Galstyan & Philip R. Lane, 2008. "External Imbalances and the Extensive Margin of Trade," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 37(3), pages 241-257, November.
    39. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g7084aa4m is not listed on IDEAS
    40. repec:tcd:wpaper:tep16 is not listed on IDEAS
    41. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g708n2m4m is not listed on IDEAS
    42. Mr. Akito Matsumoto & Mr. Charles Engel, 2009. "International Risk Sharing: Through Equity Diversification or Exchange Rate Hedging?," IMF Working Papers 2009/138, International Monetary Fund.
    43. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g708n2m4m is not listed on IDEAS
    44. Christian Broda & David W. Weinstein, 2004. "Variety Growth and World Welfare," American Economic Review, American Economic Association, vol. 94(2), pages 139-144, May.
    45. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g7485ckbm is not listed on IDEAS
    46. Robert Kollmann, 2006. "A Dynamic Equilibrium Model of International Portfolio Holdings: Comment," Econometrica, Econometric Society, vol. 74(1), pages 269-273, January.
    47. van Wincoop, Eric & Warnock, Francis E., 2010. "Can trade costs in goods explain home bias in assets?," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1108-1123, October.
    48. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    49. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    50. Peter Klenow & Huiyu Li & Albert Bollard, 2013. "Entry Costs Rise with Development," 2013 Meeting Papers 471, Society for Economic Dynamics.
    51. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g7485ckbm is not listed on IDEAS
    52. Uppal, Raman, 1993. "A General Equilibrium Model of International Portfolio Choice," Journal of Finance, American Finance Association, vol. 48(2), pages 529-553, June.
    53. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sven Blank & Mathias Hoffmann & Moritz A. Roth, 2020. "Foreign direct investment and the equity home bias puzzle," Working Papers 2008, Banco de España.
    2. Masashige Hamano & Pierre M. Picard, 2017. "Extensive and intensive margins and exchange rate regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 804-837, August.
    3. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    4. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 26-46.
    5. Fabio Ghironi, 2018. "Macro needs micro," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 34(1-2), pages 195-218.
    6. Khalil, Makram, 2019. "Cross-border portfolio diversification under trade linkages," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 114-128.
    7. Kim, Daisoon, 2021. "Economies of scale and international business cycles," Journal of International Economics, Elsevier, vol. 131(C).
    8. Kim, Kyounghun & Kim, Sunghyun Henry, 2021. "Explaining equity home bias using hedging motives against real exchange rate and wage risks," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 30-43.
    9. Cacciatore, Matteo & Ghironi, Fabio & Stebunovs, Viktors, 2015. "The domestic and international effects of interstate U.S. banking," Journal of International Economics, Elsevier, vol. 95(2), pages 171-187.
    10. Masashige Hamano, 2017. "Missing Risk Sharing from International Transmission through Product Quality and Variety," DEM Discussion Paper Series 17-17, Department of Economics at the University of Luxembourg.
    11. Hamano, Masashige, 2022. "International risk sharing with heterogeneous firms," Journal of International Money and Finance, Elsevier, vol. 120(C).
    12. Masashige Hamano & Pierre M. Picard, 2017. "Extensive and intensive margins and exchange rate regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 804-837, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    2. Coeurdacier, Nicolas & Gourinchas, Pierre-Olivier, 2016. "When bonds matter: Home bias in goods and assets," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 119-137.
    3. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
    4. Ghironi, Fabio & Lee, Jaewoo & Rebucci, Alessandro, 2015. "The valuation channel of external adjustment," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 86-114.
    5. repec:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    6. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    7. Jonathan Heathcote & Fabrizio Perri, 2013. "The International Diversification Puzzle Is Not as Bad as You Think," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1108-1159.
    8. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2009. "International Portfolios with Supply, Demand, and Redistributive Shocks," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 231-263, National Bureau of Economic Research, Inc.
    9. Hu, Chenyue, 2020. "Industrial specialization matters: A new angle on equity home Bias," Journal of International Economics, Elsevier, vol. 126(C).
    10. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 26-46.
    11. Bhamra, Harjoat S. & Coeurdacier, Nicolas & Guibaud, Stéphane, 2014. "A dynamic equilibrium model of imperfectly integrated financial markets," Journal of Economic Theory, Elsevier, vol. 154(C), pages 490-542.
    12. Mukherjee, Rahul, 2015. "Institutions, Corporate Governance and Capital Flows," Journal of International Economics, Elsevier, vol. 96(2), pages 338-359.
    13. Devereux, Michael B. & Sutherland, Alan, 2010. "Valuation effects and the dynamics of net external assets," Journal of International Economics, Elsevier, vol. 80(1), pages 129-143, January.
    14. Gianluca Benigno & Hande Küçük, 2012. "Portfolio allocation and international risk sharing," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 535-565, May.
    15. Khalil, Makram, 2019. "Cross-border portfolio diversification under trade linkages," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 114-128.
    16. Marta Arespa, 2015. "Endogenous Home Bias in Portfolio Diversification and Firms’ Entry," Review of International Economics, Wiley Blackwell, vol. 23(1), pages 14-44, February.
    17. Nicolas Coeurdacier & Hélène Rey, 2010. "Home bias in open economy financial macroeconomics," SciencePo Working papers hal-01069440, HAL.
    18. Hnatkovska, Viktoria, 2010. "Home bias and high turnover: Dynamic portfolio choice with incomplete markets," Journal of International Economics, Elsevier, vol. 80(1), pages 113-128, January.
    19. Heathcote, Jonathan & Perri, Fabrizio, 2014. "Assessing International Efficiency," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 523-584, Elsevier.
    20. Coeurdacier, Nicolas, 2009. "Do trade costs in goods market lead to home bias in equities?," Journal of International Economics, Elsevier, vol. 77(1), pages 86-100, February.
    21. Devereux, Michael B. & Saito, Makoto & Yu, Changhua, 2020. "International capital flows, portfolio composition, and the stability of external imbalances," Journal of International Economics, Elsevier, vol. 127(C).
    22. Zhang, Ning, 2019. "Country portfolios under global imbalances," European Economic Review, Elsevier, vol. 119(C), pages 302-317.

    More about this item

    Keywords

    Real exchange rate; Home biased equity puzzle; Firm entry; Firm heterogeneity;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:inecon:v:96:y:2015:i:1:p:212-226. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505552 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.