Essays on international portfolio choices and capital flows
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2016Author
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Abstract
The goal of this thesis is to study the international portfolio choices of countries
in an asymmetric world. In practice, this corresponds to the salient facts of
country portfolios and the underlying structural asymmetries between developing
and developed countries in a financially integrated world. In the three main
chapters of the thesis, frameworks are developed to advance our understanding
of the way various country asymmetries contribute to the emergence of these
persistent phenomena in international capital markets.
The first essay studies the question of why developing countries experience net
equity inflows and bond outflows while developed countries experience net equity
outflows and bond inflows, the so-called ‘two-way capital flows’. The analysis is
based on an open-economy New Keynesian model of endogenous country portfolios
with representative agents in each country. The model is so general that
it allows one to perform an assessment of the roles of a long list of country
asymmetries in determining the pattern of two-way capital flows.
While steady-state net country portfolios are zero in the first essay, the second
and third essays consider the situations where this is not true. The second essay
presents an OLG model of an endowment economy with a country asymmetry in
households’ patience. Global imbalances in net positions emerge. Gross portfolio
positions are obtained as the sum of standard self-hedging and, moreover, the
hedging due to external imbalances. The valuation effects of external adjustments
between creditor and debtor countries are rationalized.
By introducing non-tradable risks, the third essay models a production OLG
economy with a country asymmetry in wealth division. Global imbalances in
net positions again arise. Gross portfolio positions are composed of self-hedging,
hedging of non-tradable income and hedging of external interest payments, which
accounts for the reality of asymmetric asset home bias, i.e. although assets are
locally biased everywhere, the pattern is more pronounced in creditor countries.
Type
Thesis, PhD Doctor of Philosophy
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