NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Asset Liquidity and International Portfolio Choice

Athanasios Geromichalos, Ina Simonovska

NBER Working Paper No. 17331
Issued in August 2011
NBER Program(s):   IFM

We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relatively more domestic assets. Consequently, agents have larger claims to domestic over foreign consumption. Moreover, foreign assets turn over faster than domestic assets because the former have desirable liquidity properties, but represent inferior saving tools. Our mechanism offers an answer to a long-standing puzzle in international finance: a positive relationship between consumption and asset home bias coupled with higher turnover rates of foreign over domestic assets.

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A data appendix is available at http://www.nber.org/data-appendix/w17331

This paper was revised on November 13, 2013

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Document Object Identifier (DOI): 10.3386/w17331

Published: Geromichalos, A., and I. Simonovska (2014): “Asset Liquidity and International Portfolio Choice,” Journal of Economic Theory, 151(1), 342-380.

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