International Portfolio Diversification: Short-Term Financial Assets and Gold
AbstractUsing a continuous-time finance-theoretic framework, this paper presents the optimal portfolio rule of an international investor who consumes N national composite goods and who holds N domestic-currency-denominated assets with known nominal interest rates in an environment where prices of goods, assets and exchange rates follow geometric Brownian motion. It is shown that the currency portfolio rule described in Macedo (1982a) is applicable to the case where there are N assets with a known price and one asset, gold, with a random rice in terms of the numeraire. Under these assumptions, it is found that the optimal portfolio of an investor consuming goods from all major industrialized countries (according to their weight in total trade) would be dominated in March 1981 by long positions in U.S. dollars (25%), yen (17%), D. marks (16%), French francs (15%) and pounds sterling (10%). An investor consuming only U.S. goods, by contrast, would hold 96% of his optimal portfolio in U.S. dollars. Because of the covariance of exchange rates and gold, the exclusion of the latter generates substantial reshuffling. The analysis of the evolution of portfolios over time shows that shares changed dramatically at the beginning of the period and did not begin to approach their March 1981 values until the end of 1975. In the case of the yen and the pound there were oscillations throughout the period. With respect to the dollar share in the optimal portfolio of the U.S. and international investor, it is found that, in the period between late 1974 and mid-1976, a period in which the dollar is considered to have been "strong", a large decline in its optimal share took place.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0960.
Date of creation: Apr 1985
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Publication status: published as Jorge Braga de Macedo, Jeffrey Goldstein, David Meerschwam. "International Portfolio Diversification: Short-Term Financial Assets and Gold," in John F. O. Bilson and Richard C. Marston, eds., "Exchange Rate Theory and Practice" University of Chicago Press (1984)
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- Jorge Braga de Macedo & Jeffrey Goldstein & David Meerschwam, 1984. "International Portfolio Diversification: Short-Term Financial Assets and Gold," NBER Chapters, in: Exchange Rate Theory and Practice, pages 199-238 National Bureau of Economic Research, Inc.
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