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One Proposition about Dynamic Portfolio Selection in an Open Economy and International Diversification

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  • Takaaki Aoki

    (State University of New York at Buffalo, Department of Economics)

Abstract

This paper describes one proposition about dynamic Markowitz portfolio selection in a two-country open economy. Here it is proved that, assuming that two countries in an open economy share the same risk absolute aversion coefficient and the same information set with some conditions, the portfolio each country holds always attains the same rate of return, regardless of any other symmetric/asymmetric characteristics of the open economy. One basic implication of this proposition is that, when two countries share the common information set, each country might be, under these non-general conditions, indifferent, regarding the allocation of home/foreign risky assets, to the diffusion of exchange rate price process. Finally, I discuss another implication of this proposition in the relation with international portfolio diversification and so called the "home bias puzzle".

Suggested Citation

  • Takaaki Aoki, 2008. "One Proposition about Dynamic Portfolio Selection in an Open Economy and International Diversification," Economics Bulletin, AccessEcon, vol. 6(18), pages 1-8.
    • Handle: RePEc:ebl:ecbull:eb-08f30006
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    References listed on IDEAS

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    1. Coakley, Jerry & Fuertes, Ana-Maria & Smith, Ron, 2006. "Unobserved heterogeneity in panel time series models," Computational Statistics & Data Analysis, Elsevier, vol. 50(9), pages 2361-2380, May.
    2. Imed Drine & Christophe Rault, 2008. "Purchasing Power Parity For Developing And Developed Countries. What Can We Learn From Non‐Stationary Panel Data Models?," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 752-773, September.
    3. Sofia Babilis & Valpy Fitzgerald, 2005. "Risk Appetite, Home Bias and the Unstable Demand for Emerging Market Assets," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(4), pages 459-476.
    4. Christophe Rault, 2007. "Purchasing Power Parity for Developing and Developed Countries: What can we learn from Non-Stationary Panel Data Models," Post-Print halshs-00206153, HAL.
    5. I. Drine & Christophe Rault, 2007. "Purchasing Power Parity for developing and developed. What can we Learn from Non-Stationary Panel Data Models?," Post-Print halshs-00202773, HAL.
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    More about this item

    Keywords

    International Diversification;

    JEL classification:

    • F3 - International Economics - - International Finance
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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