Interactions between domestic and foreign investment
AbstractWe present a model of portfolio allocation by noise traders who form incorrect expectations about the variance of the return distribution of a particular asset. We show that for many types of misperceptions, as long as such noise traders do not affect prices, they earn higher expected returns than do rational investors with similar degrees of risk aversion. Moreover, many such noise traders survive and dominate the market in terms of wealth in the long run, in the sense that the probability that noise traders will eventually have a high share of the economy's wealth is arbitrarily close to one. Noise traders come to dominate the market despite the fact that they take excessive risk that skews the distribution of their long run wealth and despite their excessive consumption. We conclude that the theoretical case against the long run viability of noise traders is by no means as clear cut as is commonly supposed.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 11 (1992)
Issue (Month): 1 (February)
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Web page: http://www.elsevier.com/locate/inca/30443
Other versions of this item:
- Guy V.G. Stevens & Robert E. Lipsey, 1988. "Interactions between domestic and foreign investment," International Finance Discussion Papers 329, Board of Governors of the Federal Reserve System (U.S.).
- Robert E. Lipsey & Guy V.G. Stevens, 1992. "Interactions between Domestic and Foreign Investment," NBER Working Papers 2714, National Bureau of Economic Research, Inc.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter M. Garber & Robert G. King, 1983. "Deep Structral Excavation? A Critique of Euler Equation Methods," NBER Technical Working Papers 0031, National Bureau of Economic Research, Inc.
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- Magnus Blomstrom & Robert E. Lipsey & Ksenia Kulchycky, 1989.
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