The International Diversification Puzzle When Goods Prices are Sticky: It's Really about Exchange-Rate Hedging, Not Equity Portfolios

By Charles M. Engel, A. Matsumoto. Social Science Research Network, 2009

146 citations recorded by the source corpus.

This paper develops a two-country monetary DSGE model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some nominal goods prices are sticky. Trade in these assets achieves the same allocations as trade in a complete set of nominal state-contingent claims in our linearized model. When there is a high degree of price stickiness, we show that not much equity diversification is required to replicate the complete-markets equilibrium when agents are able to hedge foreign exchange risk sufficiently. Moreover, temporarily sticky nominal goods prices can have large effects on equity portfolios even when dividend processes are very persistent. (JEL E13, F41, G11, G15)

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7ce006752e82bc9a891fb565482c249eb062ec53

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Citations in the corpus

• Valuation Effects and the Dynamics of Net External Assets (2009, unknown): “…two sources of risk - one from capital income, which is assumed to be internationally diversifiable through equity 1See, for instance Coeurdacier (2009), Evans and Hnatkovska, (2005), Kollmann (2006), Engel and Matsumoto (2008), Devereux and Sutherland (2007, 2008), Tille and Van Wincoop, (2007).”
• International Risk Cycles (2011, unknown): “It thus relates to a recent stream of papers on international portfolio allocation problem (see Evans and Hnatkovska (2005), Engel and Matsumoto (2009), Devereux and Sutherland (2010, forthcoming), and Coeurdacier, Kollmann and Martin (2010), for recent contributions on this question).”
• International Currencies and Capital Allocation (2020, background): “home biased) portfolio allocation (Van Wincoop and Warnock (2006, 2010); Engel and Matsumoto (2009); Coeurdacier and Gourinchas (2016)).”
• A method for solving general equilibrium models with incomplete markets and many financial assets (2012, unknown): “2 Solutions to portfolio problems with complete markets are developed in Heathcote and Perri (2008), Serrat (2001), Kollmann (2006), Baxter et al. (1998), Uppal (1993), and Engel and Matsumoto (2009).”
• The Valuation Channel of External Adjustment (2009, unknown): “Moreover, as shown in equation (25), our definition of portfolio adjustment corresponds to the current account as conventionally measured in balance of payments statistics, thereby implying that our definition of valuation also corresponds to the conventional measure of valuation as the difference b”
• Home bias in open economy financial macroeconomics (2013, unknown): “A similar theoretical point is made in Engel and Matsumoto (2009a) in the specific case of a two country/two good DSGE model with monopolistic competition and sticky prices.”