NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Ju Hyun Pyun

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Working Papers

March 2012Multilateral Resistance to International Portfolio Diversification
with Paul R. Bergin: w17907
Not only are investors biased toward home assets, but when they do invest abroad, they appear to favor countries with returns more correlated with home assets, reducing diversification yet further. This paper argues that understanding this correlation puzzle requires a multi-county theoretical perspective, and we construct an N-country DSGE model that allows for heterogeneous stock return correlations. It shows that bilateral asset holdings depend not only upon the stock return correlation with the destination country, but also on the correlation with all other countries. This effect is analogous to ‘multilateral resistance’ in the trade literature. An empirical study controlling for this multilateral resistance in correlations overturns the result of preceding literature, finding that hig...

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