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Portfolio Choices with Near Rational Agents: A Solution of Some International-Finance Puzzles

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  • Pierpaolo Benigno

Abstract

A dynamic model of consumption and portfolio decisions is analyzed in which agents seek robust choices against some misspecification of the model probability distribution. This near-rational environment can at the same time explain an imperfect international portfolio diversification and break the link between cross-country consumption correlation and real exchange rate as it is usually implied by standard preference specifications. Portfolio decisions imply moment restrictions on asset prices that are useful to extract information on the degree of near-rationality present in the data.

Suggested Citation

  • Pierpaolo Benigno, 2007. "Portfolio Choices with Near Rational Agents: A Solution of Some International-Finance Puzzles," NBER Working Papers 13173, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13173
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    Cited by:

    1. Cosmin Ilut, 2012. "Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 33-65, July.
    2. Nguyen, Ha, 2011. "Valuation effects with transitory and trend productivity shocks," Journal of International Economics, Elsevier, vol. 85(2), pages 245-255.

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    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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