Portfolio Choice in a Monetary Open-Economy DSGE Model

By Charles M. Engel, A. Matsumoto. Social Science Research Network, 2005

120 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 goods prices are set without full information of the state. We show that temporarily sticky nominal goods prices can have large effects on equity portfolios. Home and foreign portfolios are not identical in equilibrium. In response to technology shocks, sticky prices generate a negative correlation between labor income and the profits of domestic firms, biasing portfolios in favor of home equities. In contrast, under flexible prices, labor income and the profits of the domestic firms are positively correlated. Even a small amount of nominal price stickiness can generate these portfolio differences, depending on the diversification role played by the terms of trade. Returns on human capital and equities may be positively correlated under sticky prices when the source of shocks is monetary, but this risk is hedged through nominal assets rather than through equities.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/dd3329933935f4114708f5c9ce1e53e891087676

Citations in the corpus

• Home bias in open economy financial macroeconomics (2013, unknown): “They can generate home bias in equities for the same reason as Engel and Matsumoto (2008a).”
• Solving for Country Portfolios in Open Economy Macro Models (2007, unknown): “Engel and Matsumoto (2005) and Kollmann (2006) represent examples of such an approach.”
• Home Bias in Global Bond and Equity Markets: The Role of Real Exchange Rate Volatility (2007, unknown): “…others have argued that the home bias in financial asset holdings is much smaller than often assumed because domestic financial assets may provide a natural hedge against idiosyncratic risk to domestic non-tradables, such as labour income (Engel and Matsumoto, 2005; Pesenti and van Wincoop, 2002).”
• Financial Globalization and Monetary Policy (2007, unknown): “The full solution to the model is described by the sequence n Ct; C t ; e PH;t; e PF;t; PH;t; PFt; St; Yt; Y t ; Rt; R tg, fr1;t::rN;tg, and the vector t = f 1;t:: N;tg which solves equations (5)(7), (9)-(11) and the equivalent equations for the foreign economy.”
• Financial Globalization, Governance, and the Evolution of the Home Bias (2006, unknown): “6 However, in the Engel and Matsumoto (2006) dynamic general equilibrium model, if goods prices are sticky, productivity shocks can make it optimal to overweight domestic equities.”
• Infrequent Portfolio Decisions: A Solution to the Forward Discount Puzzle (2010, unknown): “Maximizing the resulting time t + k value function with respect to bt;t+k yields the optimal portfolio bt;t+k = b (k) + Et+k(qt+k+1) ( 1)̂(2) F (k) + 2 F +DYt+k (32)”
• Do trade costs in goods market lead to home bias in equities (2009, unknown): “Moreover, as shown by Devereux and Sutherland (2006a,b) and Tille and Van Wincoop (2007), up to a first-order approximation for the goods market equilibrium (the non-portfolio equations), portfolios are exactly the static ones, i.”
• The Role of Portfolio Constraints in the International Propagation of Shocks (2008, unknown): “For other recent attempts to break the financial market structure irrelevancy result, see Engel and Matsumoto (2006), Ghironi, Lee, and Rebucci (2005), Pavlova and Rigobon (2007), Serrat (2001), and Soumare and Wang (2007).”
• Financial Exchange Rates and International Currency Exposures (2010, unknown): “where V ALit is the aggregate valuation term de…ned in equation (2) and V ALXR it is the currency valuation term de…ned in equation (14), with both scaled by GDP.”
• COUNTRY PORTFOLIOS IN OPEN ECONOMY MACRO‐MODELS (2011, unknown): “In particular we use the symmetric non-stochastic steady state, where W = 0: It follows from equations (4) and (6) that r1 = r2 = 1= and thus rx = 0: Equations (3) and (5) therefore imply that Y = Y = C = C : Since W = 0, it also follows that 2 = 1 =  2 =  1 = : As argued above, solving for the”