TAILIEUCHUNG - When Bonds Matter: Home Bias in Goods and Assets 

Work to introduce the new Basel II regulatory system is underway and a pilot project was launched in 2003 to operate a risk-based supervision system. The introduction has, however, been postponed to 2009 for banks with only domestic operations, and to 2008 for other banks as it takes time to raise capital. Enhanced competition has also been introduced by allowing new entries into the market. A dozen private Indian banks have been created and about 30 new foreign banks had entered the market and started operations by end-2006. Prudential reforms have been implemented. But while interest rates have been deregulated,. | FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES When Bonds Matter Home Bias in Goods and Assets Nicolas Coeurdacier London Business School Pierre-Olivier Gourinchas University of California at Berkeley June 2008 Working Paper 2008-25 http publications economics papers 2008 The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. This paper was produced under the auspices of the Center for Pacific Basin Studies within the Economic Research Department of the Federal Reserve Bank of San Francisco. When Bonds Matter Home Bias in Goods and Assets Nicolas Coeurdacier Pierre-Olivier Gourinchasx London Business School University of California at Berkeley June 20 2008 Preliminary and Incomplete. Do not distribute. Abstract Recent models of international equity portfolios exhibit two potential weaknesses 1 the structure of equilibrium equity portfolios is determined by the correlation of equity returns with real exchange rates yet empirically equities don t appear to be a good hedge against real exchange rate risk 2 Equity portfolios are highly sensitive to preference parameters. This paper solves both problems. It first shows that in more general and realistic environments the hedging of real exchange rate risks occurs through international bond holdings since relative bond returns are strongly correlated with real exchange rate fluctuations. Equilibrium equity positions are then optimally determined by the correlation of equity returns with the return on non-financial wealth conditional on the bond returns. The model delivers equilibrium portfolios that are well-behaved as a function of the underlying preference parameters. We find reasonable empirical support for the theory for G-7 countries. We are able to explain short positions in domestic currency bonds for all G-7

• Ngân hàng - Tín dụng
• provides supporting
• limited ability
• Separability (RLS)
• Feature (Gene)
• Subset Selection
• Disease Gene Prioritization