The Role of Nonseparable Utility and Nontradables in International Portfolio Choice∗
نویسندگان
چکیده
This paper analyzes the role of nonseparable utility and nontradables in business cycles and portfolio choice using a two-country, two-sector production economy model with a fairly general utility function. I find that nonseparability in utility can change the optimal portfolio choice significantly. Unlike the results of Stockman and Dellas (1989) or Baxter, Jermann and King (1998), the optimal portfolio of the traded-good sector equities is no longer a well diversified portfolio under nonseparability. The optimal portfolios of both tradedand nontraded-good sector equities become sensitive to the elasticity of substitution between traded and nontraded goods and the coefficient of relative risk aversion. 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. JEL Classification: E32, F30, F40, G11.
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