This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Journal: Macroeconomics
  4. January 2012
  5. International Portfolio Allocation under Model Uncertainty

International Portfolio Allocation under Model Uncertainty

  • Pierpaolo Benigno
  • Salvatore Nisticò
American Economic Journal: Macroeconomics
vol. 4, no. 1, January 2012
(pp. 144-89)
Download Full Text PDF

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)

Citation

Benigno, Pierpaolo, and Salvatore Nisticò. 2012. "International Portfolio Allocation under Model Uncertainty." American Economic Journal: Macroeconomics, 4 (1): 144-89. DOI: 10.1257/mac.4.1.144

Additional Materials

JEL Classification

  • C58 Financial Econometrics
  • F31 Foreign Exchange
  • G11 Portfolio Choice; Investment Decisions
  • G15 International Financial Markets
There are no comments for this article.
Login to Comment