WAGES, PROFITS AND THE INTERNATIONAL PORTFOLIO PUZZLE

This paper investigates the impact of fluctuations in the return to hu man capital on the composition of international asset portfolios. We a dopt a continuous-time VAR model of international portfolio choice whi ch allows for intertemporal interactions between wage rates and capita l returns. Applying the model to a large set of OECD countries, our fi ndings account for an average bias of about 30 percentage points towar d domestic securities. The results are quantitatively similar both whe n a 'fundamentals' approach is adopted to compute the returns to domes tic capital from data on aggregate operating surpluses, and when data on financial returns are used to evaluate the overall payoff of a clai m on a country's productive resources.