Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
Using the IMF CPIS data on cross-border financial assets, I find that the share of equity in a bilateral portfolio decreases with bilateral trade. Strengthening trade linkages is strongly related to rising holdings of foreign debt but not so to holdings of foreign equity. The results are rationalised by a model of international portfolios in which deepening trade integration increases the exposure of the household consumption basket to deteriorating terms of trade. With rising trade, a sufficiently risk averse representative agent therefore chooses to hold a larger amount of foreign bonds that are well suited to hedge this risk.