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Social Status, Portfolio Externalities, and International Risk Sharing

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  • Timothy K. Chue

    (School of Accounting and Finance, Faculty of Business, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong SAR, China)

Abstract

We show that a model of “the spirit of capitalism”, or the concern for social status, can generate a high degree of international risk sharing as measured by asset prices, even when consumption and portfolio holdings exhibit “home bias”. We also show how portfolio externalities can arise in the model and highlight the caution that one needs in interpreting asset-price-based measures of international risk sharing: in the presence of portfolio externalities, even when the measured degree of risk sharing is perfect, it is still possible for government policies to induce investors to hold better-diversified portfolios and attain higher welfare.

Suggested Citation

  • Timothy K. Chue, 2024. "Social Status, Portfolio Externalities, and International Risk Sharing," JRFM, MDPI, vol. 17(10), pages 1-11, October.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:10:p:464-:d:1498036
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    References listed on IDEAS

    as
    1. Smith, William T, 2001. "How Does the Spirit of Capitalism Affect Stock Market Prices?," The Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1215-1232.
    2. Duflo, Esther & Saez, Emmanuel, 2002. "Participation and investment decisions in a retirement plan: the influence of colleagues' choices," Journal of Public Economics, Elsevier, vol. 85(1), pages 121-148, July.
    3. Stockman, Alan C. & Dellas, Harris, 1989. "International portfolio nondiversification and exchange rate variability," Journal of International Economics, Elsevier, vol. 26(3-4), pages 271-289, May.
    4. Brandt, Michael W. & Cochrane, John H. & Santa-Clara, Pedro, 2006. "International risk sharing is better than you think, or exchange rates are too smooth," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 671-698, May.
    5. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
    6. Kavous Ardalan, 2019. "Equity Home Bias: A Review Essay," Journal of Economic Surveys, Wiley Blackwell, vol. 33(3), pages 949-967, July.
    7. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
    Full references (including those not matched with items on IDEAS)

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