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A Model For Market Closure And International Portfolio Management Within Incomplete Information

Author

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  • MONDHER BELLALAH

    () (Professor of Finance, Université de Cergy-Pontoise, 33 boulevard du port, 95000 Cergy, France)

  • ZHEN WU

    () (School of Mathematics and System Sciences, Shandong University, Jinan 250100, P. R. China)

Abstract

This paper presents of model of market closure in the management of international portfolios. We consider an investor holding a portfolio of domestic stocks and foreign stocks who faces market closure in the management of his portfolio. The investor's portfolio is affected by the exchange rate risk and different dynamics of the underlying assets during the period of trading and non-trading. The investor must determine the optimal proportions of his wealth to allocate to domestic stocks and foreign stocks during the market open and close periods. The paper investigates the effects of opening and closing on transactions demand of domestic and foreign stocks. The transactions demand at open and close periods in the securities markets are studied in the presence of information costs using the main concepts in Merton's (1987) model of capital market equilibrium with incomplete information. Using optimal control theory, we provide a solution in the general case and propose analytic solutions for the constant relative aversion utility functions. The model can be applied to solve several problems in financial economics in the presence of market closure.

Suggested Citation

  • Mondher Bellalah & Zhen Wu, 2002. "A Model For Market Closure And International Portfolio Management Within Incomplete Information," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(05), pages 479-495.
  • Handle: RePEc:wsi:ijtafx:v:05:y:2002:i:05:n:s0219024902001559
    DOI: 10.1142/S0219024902001559
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    Citations

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    Cited by:

    1. Mondher Bellalah & Zhen Wu, 2009. "A simple model of corporate international investment under incomplete information and taxes," Annals of Operations Research, Springer, vol. 165(1), pages 123-143, January.
    2. Mondher Bellalah & Detao Zhang, 2019. "An intertemporal capital asset pricing model under incomplete information and short sales," Annals of Operations Research, Springer, vol. 281(1), pages 143-159, October.
    3. Mondher Bellalah, 2018. "On information costs, short sales and the pricing of extendible options, steps and Parisian options," Annals of Operations Research, Springer, vol. 262(2), pages 361-387, March.
    4. Mondher Bellalah, 2009. "Derivatives, Risk Management & Value," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7175, November.
    5. Bellalah, Mondher & Zhang, Detao, 2017. "A model for international capital markets closure in an economy with incomplete markets and short sales," Economic Modelling, Elsevier, vol. 67(C), pages 316-324.
    6. Mondher Bellalah & Xu Guo & Shuo Wu & Detao Zhang, 0. "General equilibrium with heterogeneous participants and continuous consumption with information costs and short selling constraints," Annals of Operations Research, Springer, vol. 0, pages 1-20.

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