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 of- fers a better investment opportunity for hedging against changes in preference. The de- pendence 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. ©2023 Elsevier B.V. All rights reserved.
Curatola, G., Dergunov, I. (2023). International capital markets with interdependent preferences: Theory and empirical evidence. JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION, 212, 403-421 [10.1016/j.jebo.2023.05.045].
International capital markets with interdependent preferences: Theory and empirical evidence
Curatola, Giuliano;
2023-01-01
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 of- fers a better investment opportunity for hedging against changes in preference. The de- pendence 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. ©2023 Elsevier B.V. All rights reserved.File | Dimensione | Formato | |
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https://hdl.handle.net/11365/1234714