Portfolio choice analysis in a multi-country macro model
Year: 2024
Type: article
Abstract: This paper examines portfolio choice in a dynamic stochastic general equilibrium model with trade and financial linkages across 43 countries. I conduct comparative statics analysis with this structural model to disentangle potential mechanisms of global financial allocation, including risk hedging, risk diversification, risk sharing, and financial friction. For asset home bias, the model predicts that risk hedging is less essential in a multi-country than in a two-country setting. For bilateral asset positions, the model implies that variations in financial friction and asset covariance are major determinants of observed cross-country portfolios. Meanwhile, bilateral financial linkages strongly covary with trade linkages across countries. Comparative statics suggests that this covariance is mainly driven by the high correlation of frictions across the two channels of globalization.
Author: Chenyue Hu
Institution: University of California, Santa Cruz
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $2,890
OpenAlex ID: W4405236133