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International Dynamic Asset Allocation and the Effect of the Exchange Rate

Listed author(s):
  • Kristien Smedts
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    This paper analyzes a stylized theoretical framework to examine optimal portfolio selection in an international context with an explicit focus on the effect of the exchange rate. More specifically, we study how the elimination of the exchange rate induces shifts in the optimal international portfolio. We show that the effect of the elimination of the exchange rate on the optimal portfolio is twofold. First, the volatility of the international portfolio changes (volatility effect of the exchange rate), and second, the national market prices of risk converge to common international market prices of risk (price effect of the exchange rate). This induces important shifts in the optimal international portfolio.

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    Paper provided by KU Leuven, Faculty of Economics and Business, Department of Economics in its series Working Papers Department of Economics with number ces0404.

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    Date of creation: Mar 2004
    Handle: RePEc:ete:ceswps:ces0404
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