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The Role of Nonseparable Utility and Nontradeables in International Business Cycle and Portfolio Choice

Author/Editor: Matsumoto, Akito
Authorized for Distribution: July 1, 2007
Electronic Access: Free Full Text (PDF file size is 590KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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.
 
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Series: Working Paper No. 07/163
Subject(s): Asset management | Business cycles | Financial integration | Investment | Risk management | Economic models
Author's keyword(s): International business cycle | international portfolio choice | nonseparability in utility | nontraded goods | nontraded factors
 
English  
    Published:   July 1, 2007        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2007163   Pages:   32
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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