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Department of Economics, WU (Wirtschaftsuniversität Wien) Working papers, Department of Economics, WU (Wirtschaftsuniversität Wien)

No 159:
International Portfolios: A Comparison of Solution Methods

Katrin Rabitsch (), Serhiy Stepanchuk () and Viktor Tsyrennikov ()

Abstract: We compare the performance of the perturbation-based (local) portfolio solution method of Devereux and Sutherland (2010a, 2011) with a global solution method. We find that the local method performs very well when the model is designed to capture stylized macroeconomic facts and countries/agents are symmetric, i.e. when the latter have similar size, face similar risks and trade assets with similar risk properties. It performs less satisfactory when the agents engaged in financial trade are asymmetric. The global solution method performs substantially better when the model is parameterized to match the observed equity premium, a key stylized finance fact.

Keywords: Country Portfolios, Solution Methods; (follow links to similar papers)

JEL-Codes: E44,; F41,; G11,; G15; (follow links to similar papers)

January 2014

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