The International Diversification Puzzle When Goods Prices Are Sticky: It's Really about Exchange-Rate Hedging, Not Equity Portfolios
Charles Engel and Akito Matsumoto
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| Article Citation |
Engel, Charles, and Akito Matsumoto. 2009. "The International Diversification Puzzle When Goods Prices Are Sticky: It's Really about Exchange-Rate Hedging, Not Equity Portfolios." American Economic Journal: Macroeconomics, 1(2): 155–88.
DOI:10.1257/mac.1.2.155
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| Abstract |
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. Trade in these assets achieves the same allocations as
trade in a complete set of nominal state-contingent claims in our
linearized model. When there is a high degree of price stickiness, we
show that not much equity diversification is required to replicate the
complete-markets equilibrium when agents are able to hedge foreign
exchange risk sufficiently. Moreover, temporarily sticky nominal
goods prices can have large effects on equity portfolios even when
dividend processes are very persistent. (JEL E13, F41, G11, G15)
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| Additional Materials |
Online Appendix
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| Authors |
Engel, Charles (U WI)
Matsumoto, Akito (IMF)
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| JEL Classifications |
E13: General Aggregative Models: Neoclassical
G11: Portfolio Choice; Investment Decisions
G15: International Financial Markets
F41: Open Economy Macroeconomics
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