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International capital markets with interdependent preferences: Theory and empirical evidence.

Authors :
Curatola, Giuliano
Dergunov, Ilya
Source :
Journal of Economic Behavior & Organization. Aug2023, Vol. 212, p403-421. 19p.
Publication Year :
2023

Abstract

We propose a two-country model in which preferences change endogenously as a function of the popularity of traded goods. In equilibrium, expected returns and return volatility vary over time, agents prefer popular goods, and their portfolios are biased toward the country that produces the preferred goods. A home bias arises because home equity offers a better investment opportunity for hedging against changes in preference. The dependence of state prices on time-varying popularity reduces the cross-country correlation of consumption growth. These results do not hold when the preferences are constant. The comparison between empirical impulse response functions and those implied by the model supports our theory. [ABSTRACT FROM AUTHOR]

Details

Language :
English
ISSN :
01672681
Volume :
212
Database :
Academic Search Index
Journal :
Journal of Economic Behavior & Organization
Publication Type :
Academic Journal
Accession number :
169752689
Full Text :
https://doi.org/10.1016/j.jebo.2023.05.045