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Do trade costs in goods market lead to home bias in equities?

Abstract : Two of the main puzzles in international economics are the consumption and the portfolio home biases. We solve for international equity portfolios in a two-country/two-good stochastic equilibrium model with trade costs in goods markets. We show that introducing trade costs, as suggested by Obstfeld and Rogoff [Obstfeld, M., Rogoff, K., 2000a. The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? NBER Macroeconomics Annual, 15], is not sufficient to explain these two puzzles simultaneously. On the contrary, we find that trade costs create a foreign bias in portfolios for reasonable parameter values. This result is robust to the addition of non-tradable goods for standard calibrations of the preferences.
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Submitted on : Wednesday, March 9, 2022 - 10:39:30 AM
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Nicolas Coeurdacier. Do trade costs in goods market lead to home bias in equities?. Journal of International Economics, 2009, 77 (1), pp.86 - 100. ⟨hal-03602479⟩

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