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Benigno, Pierpaolo, and
Salvatore Nisticò. 2012. "International Portfolio Allocation under Model Uncertainty."
,
4(1): 144-89.
Show Article Details
DOI: 10.1257/mac.4.1.144
Abstract:This paper revisits an old argument, hedging real exchange rate risk, as an explanation of the international home bias in equity. In a dynamic model, the relevant risk to be hedged is the long-run risk as opposed to the short-run risk. Domestic equity is indeed a good hedge with respect to long-run real-exchange-rate risk. Two
new frameworks are able to explain a large share of the observed US home bias: a model with Hansen-Sargent preferences in which agents fear model misspecification and a model with Epstein-Zin preferences. These two models are also immune to the risk-free rate puzzle. (JEL C58, F31, G11, G15)
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Authors:
Benigno, Pierpaolo (LUISS "Guido Carli", Rome and EIEF)
Nisticò, Salvatore (U Rome "La Sapienza" and LUISS "Guido Carli", Rome)
JEL Classifications:
C58: Financial Econometrics
F31: Foreign Exchange
G11: Portfolio Choice; Investment Decisions
G15: International Financial Markets
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