This paper analyzes the role of nonseparable utility and nontradables in business cycles and portfolio choice. I find that nonseparability in utility can change the portfolio choice significantly. Unlike previous results in literature, the optimal portfolio of the traded-good sector equities is no longer a well diversified portfolio and becomes sensitive to parameter values. 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.
International Monetary Fund; July 2007
- ISBN 9781451911800
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- Title: The Role of Nonseparable Utility and Nontradeables in International Business Cycle and Portfolio Choice
- Author: Akito Matsumoto
Imprint: INTERNATIONAL MONETARY FUND