Recursive Origins of International Factor Structures

Abstract

I study the link between the US wealth share, the dollar and international risk sharing. Motivating this study are novel stylised facts regarding the US wealth share uncovered in this paper. Using aggregate portfolio holdings data, I find that: i) the US wealth share is countercyclical: the US gains relative wealth vis-a-vie the rest of the world (ROW) during global recessions, ii) these countercyclical wealth share dynamics are driven by valuation forces headlined by US equities: the US stock market outperforms the ROW during global recessions, iii) bond valuation forces associated with countercyclical convenience yields play a limited role in driving this valuation channel. I show that these wealth share dynamics along with traditional dollar dynamics can be rationalised using a simple two country recursive model of international risk sharing.