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Optimal investment strategies in an international economy with stochastic interest rates

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  • Larsen, Linda Sandris
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    Abstract

    We investigate how investors should optimally choose to invest in a dynamically complete international market. We find closed-form solutions for the optimal investment strategy and for the wealth loss an investor suffers from not investing internationally. Theoretically, we show that the gain from international investment is due to the speculative investment only, and why it is important for an investor from a large economy to invest in a small economy. In a numerical example we compare the wealth losses investors from Denmark and the U.S. suffer due to home bias.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 19 (2010)
    Issue (Month): 1 (January)
    Pages: 145-165

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    Handle: RePEc:eee:reveco:v:19:y:2010:i:1:p:145-165

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    Web page: http://www.elsevier.com/locate/inca/620165

    Related research

    Keywords: Dynamic asset allocation International term structure of interest rates Exchange rates Home-bias Risk/return trade-off;

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    Cited by:
    1. Lu, Jin-Ray & Chan, Chih-Ming & Wen, Mei-Hui, 2012. "Which demands affect optimal international portfolio choices?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1292-1306.

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