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Which demands affect optimal international portfolio choices?

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  • Lu, Jin-Ray
  • Chan, Chih-Ming
  • Wen, Mei-Hui
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    Abstract

    This study analyzes the asset allocations of simple international portfolios that include domestic risky assets, foreign risky assets, and domestic risk-free bonds, through a theoretical analysis. A close-form solution for the optimal holding rates is derived, and can be further sub-divided into three categories of demand: speculative demand, diversified demand, and hedging demands. We carefully explore the essential problem of identifying the underlying reasons for asset allocations, which in turn allows us to answer the question of which of these demands are critical in influencing holding changes.

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    File URL: http://www.sciencedirect.com/science/article/pii/S104244311200073X
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 22 (2012)
    Issue (Month): 5 ()
    Pages: 1292-1306

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    Handle: RePEc:eee:intfin:v:22:y:2012:i:5:p:1292-1306

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    Web page: http://www.elsevier.com/locate/intfin

    Related research

    Keywords: Exchange rate risk; Asset allocation; Stochastic model;

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    1. Flavin, Thomas J. & Panopoulou, Ekaterini, 2009. "On the robustness of international portfolio diversification benefits to regime-switching volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 140-156, February.
    2. Das, Sanjiv Ranjan & Uppal, Raman, 2002. "Systemic Risk and International Portfolio Choice," CEPR Discussion Papers 3305, C.E.P.R. Discussion Papers.
    3. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    4. Glen, Jack & Jorion, Philippe, 1993. " Currency Hedging for International Portfolios," Journal of Finance, American Finance Association, vol. 48(5), pages 1865-86, December.
    5. Abraham Lioui & Patrice Poncet, 2001. "International Asset Allocation: A New Perspective," Working Papers 2001-04, Department of Economics, Bar-Ilan University.
    6. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    7. Larsen, Linda Sandris, 2010. "Optimal investment strategies in an international economy with stochastic interest rates," International Review of Economics & Finance, Elsevier, vol. 19(1), pages 145-165, January.
    8. Devraj Basu & Roel Oomen & Alexander Stremme, 2010. "International Dynamic Asset Allocation and Return Predictability," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7-8), pages 1008-1025.
    9. Shawky, Hany A. & Kuenzel, Rolf & Mikhail, Azmi D., 1997. "International portfolio diversification: a synthesis and an update," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(4), pages 303-327, December.
    10. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
    11. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
    12. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
    13. Topaloglou, Nikolas & Vladimirou, Hercules & Zenios, Stavros A., 2008. "A dynamic stochastic programming model for international portfolio management," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1501-1524, March.
    14. Nahum Biger, 1979. "Exchange Risk Implications of International Portfolio Diversification," Journal of International Business Studies, Palgrave Macmillan, vol. 10(2), pages 63-74, June.
    15. Luitgard Veraart, 2010. "Optimal investment in the foreign exchange market with proportional transaction costs," Quantitative Finance, Taylor & Francis Journals, vol. 11(4), pages 631-640.
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