The Role of Nonseparable Utility and Nontradeables in International Business Cycles and Portfolio Choice
July 1, 2007
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Summary
This paper analyzes the role of nonseparable utility and nontradables in business cycles and portfolio choice. I find that nonseparability in utility can change the portfolio choice significantly. Unlike previous results in literature, the optimal portfolio of the traded-good sector equities is no longer a well diversified portfolio and becomes sensitive to parameter values. As a result, the model often generates extreme home bias or anti-home bias portfolios implying that some frictions in asset markets, which prevent agents from holding these extreme portfolios, can explain the lack of international risk sharing.
Subject: Asset allocation, Consumption, Productivity, Real exchange rates, Stocks
Keywords: business cycle, optimal portfolio, WP
Pages:
32
Volume:
2007
DOI:
Issue:
163
Series:
Working Paper No. 2007/163
Stock No:
WPIEA2007163
ISBN:
9781451867275
ISSN:
1018-5941
