Interactions between Domestic and Foreign Investment
We present a model of portfolio allocation by noise traders who form incorrect expectations about the variance of the return distribution of a particular asset. We show that for many types of misperceptions, as long as such noise traders do not affect prices, they earn higher expected returns than do rational investors with similar degrees of risk aversion. Moreover, many such noise traders survive and dominate the market in terms of wealth in the long run, in the sense that the probability that noise traders will eventually have a high share of the economy's wealth is arbitrarily close to one. Noise traders come to dominate the market despite the fact that they take excessive risk that skews the distribution of their long run wealth and despite their excessive consumption. We conclude that the theoretical case against the long run viability of noise traders is by no means as clear cut as is commonly supposed.
|Date of creation:||Sep 1988|
|Date of revision:|
|Publication status:||published as Journal of International Money and Finance, Vol. 11, pp. 40-62, (1992).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan K. Severn, 1972. "Investment and Financial Behavior of American Direct Investors in Manufacturing," NBER Chapters, in: International Mobility and Movement of Capital, pages 367-396 National Bureau of Economic Research, Inc.
- Magnus Blomstrom & Robert E. Lipsey & Ksenia Kulchycky, 1988.
"U.S. and Swedish Direct Investment and Exports,"
in: Trade Policy Issues and Empirical Analysis, pages 257-302
National Bureau of Economic Research, Inc.
- Peter M. Garber & Robert G. King, 1983. "Deep Structral Excavation? A Critique of Euler Equation Methods," NBER Technical Working Papers 0031, National Bureau of Economic Research, Inc.
- Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
- Guy V.G. Stevens, 1986. "Internal funds and the investment functions: exploring the theoretical justification of some empirical results," Special Studies Papers 199, Board of Governors of the Federal Reserve System (U.S.).
- Irving B. Kravis & Robert E. Lipsey, 1977.
"Price Behavior in the Light of Balance of Payments Theories,"
NBER Working Papers
0181, National Bureau of Economic Research, Inc.
- Kravis, Irving B. & Lipsey, Robert E., 1978. "Price behavior in the light of balance of payments theories," Journal of International Economics, Elsevier, vol. 8(2), pages 193-246, May.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2714. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.