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International Investment and Exchange Rate Risk: An Experimental Analysis / Eine experimentelle Untersuchung zur internationalen Vermögensdiversifikation

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  • Rötheli Tobias F.

    (Department of Economics, University of Bern, Vereinsweg 23, CH-3012 Bern, Switzerland)

Abstract

The experimental evidence gathered in this study indicates that a preference for domestic investments exists even under fixed exchange rates and in the absence of factors commonly understood to give rise to asymmetric portfolios. Adding exchange rate risk does not - contrary to theory - induce many individuals to hold more domestic assets. Non-professional investors in particular are prone to make choices at variance with the normative theory. This is traced back to misjudgments concerning the available risk-return trade-offs. It is also documented that flexibility of the exchange rate induces economic losses through inefficient portfolio choice. This even holds in a situation where exchange rate risk can be avoided by costless hedging.

Suggested Citation

  • Rötheli Tobias F., 1997. "International Investment and Exchange Rate Risk: An Experimental Analysis / Eine experimentelle Untersuchung zur internationalen Vermögensdiversifikation," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 216(3), pages 347-360, June.
    • Handle: RePEc:jns:jbstat:v:216:y:1997:i:3:p:347-360
    DOI: 10.1515/jbnst-1997-0305
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