International risk sharing and portfolio choice with non-separable preferences

Hande Küçük, Alan James Sutherland

    Research output: Working paper


    This paper aims to account for the Backus-Smith puzzle in a two-country DSGE model with endogenous portfolio choice in bonds and equities. Utility is non-separable across consumption and leisure and across time. This model is shown to imply almost zero correlation between relative consumption and the real exchange rate while generating portfolio positions that broadly match the data. Furthermore, the cross-country correlation of consumption is lower than the correlation of output, which has previously been a difficult fact to match. Non-separable preferences are found to be crucial to generating these results but financial market structure plays only a minor role.
    Original languageEnglish
    Place of PublicationLondon
    PublisherCentre for Economic Policy Research
    Number of pages35
    Publication statusPublished - Jun 2015

    Publication series

    NameCEPR Discussion Papers
    PublisherCEPR Centre for Economic Policy Research


    • Portfolio choice
    • International risk sharing
    • Consumption-real exchange rate anomaly
    • Backus-Smith puzzle
    • Non-seperable preferences
    • Incomplete markets


    Dive into the research topics of 'International risk sharing and portfolio choice with non-separable preferences'. Together they form a unique fingerprint.

    Cite this