(Asymmetric) trade costs, real exchange rate hedging, and equity home bias in a multicountry model
- Authors
- Pyun, Ju Hyun
- Issue Date
- 5월-2018
- Publisher
- WILEY
- Citation
- REVIEW OF INTERNATIONAL ECONOMICS, v.26, no.2, pp.357 - 377
- Indexed
- SSCI
SCOPUS
- Journal Title
- REVIEW OF INTERNATIONAL ECONOMICS
- Volume
- 26
- Number
- 2
- Start Page
- 357
- End Page
- 377
- URI
- https://scholar.korea.ac.kr/handle/2021.sw.korea/76076
- DOI
- 10.1111/roie.12335
- ISSN
- 0965-7576
- Abstract
- There has been controversy between (two-country) theory and the empirics about whether hedging against real exchange rate fluctuations in the goods market influences foreign equity holdings. This study reconciles the theory with the empirics by introducing a multicountry framework with asymmetric trade costs. We find that the incentive to hold foreign equities to hedge real exchange rate risk is negligible because multiple trade partners act as a hedging channel for real exchange rate fluctuations. Further, our theory calls for a country's covariance-variance ratio to be constructed as the sum of the bilateral covariance-variance ratios of the multiple partners. The empirical analysis of 24 advanced countries confirms the theoretical prediction.
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