{
  "title": "The International Diversification Puzzle when Goods Prices Are Sticky: It's Really About Exchange-Rate Hedging, not Equity Portfolios",
  "publication": "IMF Working Papers, January 1, 2009",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/the-international-diversification-puzzle-when-goods-prices-are-sticky-it-s-really-about-22571",
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  "summary": "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.",
  "sections": [
    {
      "heading": "Model and setup",
      "content": "- Two-country monetary DSGE model in which households choose:\n  - a portfolio of home and foreign equities, and\n  - a forward position in foreign exchange.\n- Some nominal goods prices are sticky.\n- In the linearized model, trade in equities and forward positions achieves the same allocations as trade in a complete set of nominal state-contingent claims."
    },
    {
      "heading": "Key findings",
      "content": "- When there is a high degree of price stickiness:\n  - Not much equity diversification is required to replicate the complete-markets equilibrium when agents can hedge foreign exchange risk sufficiently.\n- Temporarily sticky nominal goods prices can have large effects on equity portfolios even when dividend processes are very persistent."
    },
    {
      "heading": "Themes and implications",
      "content": "- Exchange-rate hedging:\n  - Central to attaining allocations close to complete-markets outcomes in the presence of sticky goods prices.\n  - More important than cross-border equity diversification for replicating risk-sharing outcomes under price stickiness.\n- Equity portfolio composition:\n  - Sensitive to nominal price stickiness; temporary rigidities can materially alter international portfolio allocations despite persistent dividend processes.\n- Asset structure equivalence:\n  - In the linearized model, trading equities plus forward FX positions is equivalent to trading a complete set of nominal state-contingent claims.\n\n---\n\n Content in this bundle\n\n- Wp0912\n  - Wp0912 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Wp0912 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-international-diversification-puzzle-when-goods-prices-are-sticky-it-s-really-about-22571"
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    "Authors: Akito Matsumoto, Charles Engel",
    "Published: January 1, 2009",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451871593.001",
    "Two-country monetary DSGE model in which households choose:",
    "Some nominal goods prices are sticky.",
    "In the linearized model, trade in equities and forward positions achieves the same allocations as trade in a complete set of nominal state-contingent claims.",
    "When there is a high degree of price stickiness:",
    "Temporarily sticky nominal goods prices can have large effects on equity portfolios even when dividend processes are very persistent.",
    "Exchange-rate hedging:",
    "Equity portfolio composition:",
    "Asset structure equivalence:",
    "**Wp0912**"
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