NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Portfolio Choices with Near Rational Agents: A Solution of Some International-Finance Puzzles

Pierpaolo Benigno

NBER Working Paper No. 13173
Issued in June 2007
NBER Program(s):   AP   IFM

A dynamic model of consumption and portfolio decisions is analyzed in which agents seek robust choices against some misspecification of the model probability distribution. This near-rational environment can at the same time explain an imperfect international portfolio diversification and break the link between cross-country consumption correlation and real exchange rate as it is usually implied by standard preference specifications. Portfolio decisions imply moment restrictions on asset prices that are useful to extract information on the degree of near-rationality present in the data.

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This paper was revised on January 8, 2008

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