The Role of Nonseparable Utility and Nontradeables in International Business Cycles and Portfolio Choice

July 1, 2007

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Format: Chicago

Akito Matsumoto. The Role of Nonseparable Utility and Nontradeables in International Business Cycles and Portfolio Choice, (USA: International Monetary Fund, 2007) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper analyzes the role of nonseparable utility and nontradables in business cycles and portfolio choice. I find that nonseparability in utility can change the portfolio choice significantly. Unlike previous results in literature, the optimal portfolio of the traded-good sector equities is no longer a well diversified portfolio and becomes sensitive to parameter values. As a result, the model often generates extreme home bias or anti-home bias portfolios implying that some frictions in asset markets, which prevent agents from holding these extreme portfolios, can explain the lack of international risk sharing.

Subject: Asset allocation, Consumption, Productivity, Real exchange rates, Stocks

Keywords: Business cycle, Optimal portfolio, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/163
Stock No:

WPIEA2007163
ISBN:

9781451867275
ISSN:

1018-5941

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