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A dynamic equilibrium model of imperfectly integrated financial markets

Nicolas Coeurdacier 1, Stéphane Guibaud 1

(08/2005)

We build a continous-time general equilibrium model of a two-country, pure-exchange economy featuring taxes on the repatriation of dividends. We find approximate closed-form expressions for asset prices, returns joint dynamics and equity portfolios, thus giving a full description of equilibrium in-between the polar cases of perfect integration and full segmentation. We show that large home bias in portfolios can result from small frictions on international financial markets. The reason is that, partly due to portfolio rebalancing, the international correlation of returns is very high - making assets close substitutes and implying that slight frictions have a dramatic effect on portfolio composition.

1 :	Paris-Jourdan Sciences Economiques (PSE)
	CNRS : UMR8545 – École des Hautes Études en Sciences Sociales [EHESS] – Ecole des Ponts ParisTech – Ecole normale supérieure de Paris - ENS Paris

Discipline

:

Sciences de l'Homme et Société/Economie et finances

Mots-Clés : asset pricing – financial integration – home bias in portfolio – international stock returns correlations – asymmetric taxation – investors heterogeneity – stochastic pareto-negishi weight

halshs-00590775, version 1

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Contributeur : Caroline Bauer <>

Soumis le : Jeudi 5 Mai 2011, 09:33:09

Dernière modification le : Vendredi 6 Mai 2011, 13:32:01