Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/167573 
Year of Publication: 
2017
Series/Report no.: 
SAFE Working Paper No. 176
Publisher: 
Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe, Frankfurt a. M.
Abstract: 
We propose a 2-country asset-pricing model where agents' preferences change endogenously as a function of the popularity of internationally traded goods. We determine the effect of the time-variation of preferences on equity markets, consumption and portfolio choices. When agents are more sensitive to the popularity of domestic consumption goods, the local stock market reacts more strongly to the preferences of local agents than to the preferences of foreign agents. Therefore, home bias arises because home-country stock represents a better investment opportunity for hedging against future fluctuations in preferences. We test our model and find that preference evolution is a plausible driver of key macroeconomic variables and stock returns.
Subjects: 
asset pricing
general equilibrium
heterogeneous agents
interdependent preferences
portfolio choice
JEL: 
D51
D52
D53
E20
E21
F21
G11
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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