This paper shows that in a non-representative agent model in which households face short selling constraints and labor income risk, in the form of both uninsurable shocks and a common aggregate component, small differences in the correlation between aggregate labor income shocks and domestic and...

This paper offers two main contributions. First, it shows how the Baxter and Jermann (1997) claim that, once we consider human capital risk, the international diversification puzzle is worse than we think, is based on an econometric misspecification rejected by the data. Second, it outlines how,...

We analyze a dual currency search model in which agents are allowed to hold multiple units of both currencies. Hence, agents hold portfolios of currency. We study equilibria in which the two currencies are identical and equilibria in which the two currencies differ according to the magnitude of...

With the Euro now a physical reality, Richard Layard argues that the economic case for Britain joining Euro-land is overwhelming.

Allowing for a richer information structure than usual, we show that rational traders’ calculation with short-term price fluctuations may heavily influence their behaviour even if the interim price is not influenced by non-rational agents i.e. there is no noise trader risk. Instead, traders...

This paper solves for optimal international portfolio choice in the presence of liquidity constraints and undiversifiable labor income risk. Optimal portfolios are internationally diversified while positive correlation between domestic stock market returns and permanent labor income shocks can...

Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In...

We solve a model with incomplete markets and heterogeneous agents that generates a large equity premium, while simultaneously matching stock market participation and individual asset holdings. The high risk premium is driven by incomplete risk sharing among stockholders, which results from the...

This paper extends the model proposed by Goodhart, Sunirand, and Tsomocos (2003, 2004a, b) to an infinite horizon setting. Thus, we are able to assess how the model conforms with the time series data of the U.K. banking system. We conclude that, since the model performs satisfactorily, it can be...

This paper surveys asset allocation methods that extend the traditional approach. An important feature of the traditional approach is that measures the risk and return tradeoff in terms of mean and variance of final wealth. However, there are also other important features that are not always...