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Trade Costs , Heterogeneous Firms and International Portfolio Choice

Trade Costs , Heterogeneous Firms and International Portfolio Choice. Daniel Andrei Gerzensee , June 2 2008. 1. Motivation. 2. Literature. 3. Benchmark Model & Solution method. 4. Heterogeneous Firms. 5. Conclusion & Discussion. 1/15. World Market Capitalization. 2/15.

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Trade Costs , Heterogeneous Firms and International Portfolio Choice

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  1. Trade Costs, HeterogeneousFirms and International Portfolio Choice Daniel Andrei Gerzensee, June 2 2008

  2. 1. Motivation 2. Literature 3. Benchmark Model & Solution method 4. HeterogeneousFirms 5. Conclusion & Discussion 1/15

  3. World MarketCapitalization 2/15

  4. World MarketCapitalization U.S. Market Cap (40% in 2005) 2/15

  5. World MarketCapitalization U.S. Market Cap (40% in 2005) 2/15

  6. World MarketCapitalization U.S. Market Cap (40% in 2005) All investorsshouldhold the market portfolio => U.S. investorsshouldhold 40% of domesticequities 2/15

  7. World MarketCapitalization True proportion of domesticequities in U.S. portfolios was 82% in 2005 U.S. Market Cap (40% in 2005) All investorsshouldhold the market portfolio => U.S. investorsshouldhold 40% of domesticequities 2/15

  8. World MarketCapitalization True proportion of domesticequities in U.S. portfolios was 82% in 2005 ? U.S. Market Cap (40% in 2005) All investorsshouldhold the market portfolio => U.S. investorsshouldhold 40% of domesticequities 2/15

  9. PotentialExplanations Corporategovernance and transparency Hedgingdomesticrisks Information asymmetries Behavioral-basedexplanations Costs and barriers for foreigninvestments 4/15

  10. PotentialExplanations Corporategovernance and transparency Hedgingdomesticrisks Information asymmetries Behavioral-basedexplanations Costs and barriers for foreigninvestments Recently, new methods have been developped to solve for optimal portfolios in DSGE models: Devereux and Sutherland (2006), Tille and Van Wincoop (2007), Evans and Hnatkovska (2005) 4/15

  11. PotentialExplanations Corporategovernance and transparency Hedgingdomesticrisks Information asymmetries Behavioral-basedexplanations Costs and barriers for foreigninvestments Recently, new methods have been developped to solve for optimal portfolios in DSGE models: Devereux and Sutherland (2006), Tille and Van Wincoop (2007), Evans and Hnatkovska (2005) THIS PAPER: (1) Solve for optimal portfolios in a two-country DSGE model. (2) Show how in a setup withheterogeneousfirms and fixed export costswecanobtain home equitypreference. 4/15

  12. Somerelatedliterature: Lucas (1982) Uppal (1993) Cole and Obstfeld (1991) Baxter and Jermann (1997) Obstfeld and Rogoff(2006) Kollmann (2006) Coeurdacier et. al. (2007) Coeurdacier (2006) Van Wincoop and Warnock (2007) Hnatkovska (2005) 5/15

  13. Somerelatedliterature: Lucas (1982) Uppal (1993) Cole and Obstfeld (1991) Baxter and Jermann (1997) Obstfeld and Rogoff(2006) Kollmann (2006) Coeurdacier et. al. (2007) Coeurdacier (2006) Van Wincoop and Warnock (2007) Hnatkovska (2005) • Extensions: • Heterogeneousfirms • Non-tradablesector • Fixedcosts to go to export • market BENCHMARK MODEL Show the difficulties to explain the home equitybias Show whywecanobtain home equitybias 5/15

  14. If goods are shipped to the another country, then a fraction τislost in transit (melting-icebergtradecosts) Export Export

  15. Takedifference: 7/15

  16. Takedifference: Treatthistemporarily as an exogenousi.i.d. variable 7/15

  17. Treatthistemporarily as an exogenousi.i.d. variable 7/15

  18. Treatthistemporarily as an exogenousi.i.d. variable 7/15

  19. Treatthistemporarily as an exogenousi.i.d. variable 7/15

  20. => Closedform solution: 7/15

  21. => Closedform solution: 7/15

  22. DOMESTIC EQUITY HELD BY DOMESTIC RESIDENTS: 7/15

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  35. HeterogeneousFirms : Setup Pareto Distribution withparameterszmin and k Productivity 10/15

  36. HeterogeneousFirms : Setup Pareto Distribution withparameterszmin and k Non-exportingfirms Exportingfirms Productivity This firmwillearnexactlyzero export profits 10/15

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  43. Fixed export costscanvary => IncompleteMarkets 13/15

  44. Fixed export costscanvary Number of exportingfirmscanvary => IncompleteMarkets 14/15

  45. CONCLUSIONS Re-confirmthatproportionaltradecostscannotlead to home bias. Fixed export costscan help. The mechanism: decreasecorrelationbetweenlaborincome and capital income. Incompletemarketscan help: more robustresults and betteroutcomes in terms of VWW statistic and consumption – RER anomaly. Show how a productivityshockcantransforminto a redistributiveshock. Introducedemandshocksinto a more intuitive way. 15/15

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