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

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6 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)212-226
Number of pages15
JournalJournal of International Economics
Volume96
Issue number1
DOIs
Publication statusPublished - 2015 May 1

Keywords

  • Firm entry
  • Firm heterogeneity
  • Home biased equity puzzle
  • Real exchange rate

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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