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Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

International Portfolios: A Comparison of Solution Methods

Katrin Rabitsch (), Serhiy Stepanchuk () and Viktor Tsyrennikov ()
Additional contact information
Katrin Rabitsch: Department of Economics, Vienna University of Economics and Business
Serhiy Stepanchuk: École Polytechnique Fédérale de Lausanne
Viktor Tsyrennikov: Cornell University

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

JEL-codes: E44; F41; G11; G15 January 2014

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