Goods Trade and International Equity Portfolios | Zendy

Fabrice Collard | Zendy; Harris Dellas | Zendy; Behzad Diba | Zendy; Alan C. Stockman | Zendy

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Goods Trade and International Equity Portfolios

Author(s) -

Fabrice Collard,

Harris Dellas,

Behzad Diba,

Alan C. Stockman

Publication year - 2007

Publication title -

international corporate finance ejournal

Language(s) - English

Resource type - Reports

DOI - 10.3386/w13612

Subject(s) - equity (law) , diversification (marketing strategy) , financial economics , portfolio , openness to experience , economics , international economics , monetary economics , international trade , business , political science , law , psychology , social psychology , marketing

We show that international trade in goods is the main determinant of international equity portfolios and offers a compelling -- theoretically and empirically -- resolution of the portfolio home bias puzzle. The model implies that investors can achieve full international risk diversification if the share of wealth invested in foreign equity matches their country's degree of openness (the imports to GDP share). The empirical evidence strongly supports this implication.

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