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Which demands affect optimal international portfolio choices?

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

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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:intfin:v:22:y:2012:i:5:p:1292-1306
    DOI: 10.1016/j.intfin.2012.07.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rate risk; Asset allocation; Stochastic model;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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