IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2714.html
   My bibliography  Save this paper

Interactions between Domestic and Foreign Investment

Author

Listed:
  • Robert E. Lipsey
  • Guy V.G. Stevens

Abstract

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.

Suggested Citation

  • Robert E. Lipsey & Guy V.G. Stevens, 1988. "Interactions between Domestic and Foreign Investment," NBER Working Papers 2714, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2714
    Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2714.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Magnus Blomstrom & Robert E. Lipsey & Ksenia Kulchycky, 1988. "U.S. and Swedish Direct Investment and Exports," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 257-302, National Bureau of Economic Research, Inc.
    4. 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.).
    5. 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.
    6. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
    2. Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, vol. 82(1), pages 107-134.
    3. William P. Osterberg, 1992. "Debt, collateral, and U.S. manufacturing investment: 1954-1980," Working Papers (Old Series) 9210, Federal Reserve Bank of Cleveland.
    4. Shapiro, Matthew D, 1986. "Capital Utilization and Capital Accumulation: Theory and Evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(3), pages 211-234, July.
    5. Robert J. Gordon & John Veitch, 1986. "Fixed Investment in the American Business Cycle, 1919-83," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 267-358, National Bureau of Economic Research, Inc.
    6. Miron, Jeffrey A, 1986. "Seasonal Fluctuations and the Life Cycle-Permanent Income Model of Consumption," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1258-1279, December.
    7. Oliner, Stephen D. & Rudebusch, Glenn D. & Sichel, Daniel, 1996. "The Lucas critique revisited assessing the stability of empirical Euler equations for investment," Journal of Econometrics, Elsevier, vol. 70(1), pages 291-316, January.
    8. Marjorie A. Flavin, 1991. "The Joint Consumption/Asset Demand Decision: A Case Study in Robust Estimation," NBER Working Papers 3802, National Bureau of Economic Research, Inc.
    9. Bansal, Ravi & Kiku, Dana & Yaron, Amir, 2016. "Risks for the long run: Estimation with time aggregation," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 52-69.
    10. Hansen, Lars Peter, 2013. "Uncertainty Outside and Inside Economic Models," Nobel Prize in Economics documents 2013-7, Nobel Prize Committee.
    11. Athanasios Geromichalos & Lucas Herrenbrueck, . "The Liquidity-Augmented Model of Macroeconomic Aggregates: A New Monetarist DSGE Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    12. Athanasopoulos, George & de Carvalho Guillén, Osmani Teixeira & Issler, João Victor & Vahid, Farshid, 2011. "Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions," Journal of Econometrics, Elsevier, vol. 164(1), pages 116-129, September.
    13. Chang, Jinyuan & Chen, Song Xi & Chen, Xiaohong, 2015. "High dimensional generalized empirical likelihood for moment restrictions with dependent data," Journal of Econometrics, Elsevier, vol. 185(1), pages 283-304.
    14. Smoluk, H. J. & Neveu, Raymond P., 2002. "Consumption and asset prices: An analysis across income groups," Review of Financial Economics, Elsevier, vol. 11(1), pages 47-62.
    15. Isaiah Andrews & Anna Mikusheva, 2016. "Conditional Inference With a Functional Nuisance Parameter," Econometrica, Econometric Society, vol. 84, pages 1571-1612, July.
    16. Hansen, Lars Peter & Heaton, John & Luttmer, Erzo G J, 1995. "Econometric Evaluation of Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 237-274.
    17. Epstein, Larry G. & Zin, Stanley E., 2001. "The independence axiom and asset returns," Journal of Empirical Finance, Elsevier, vol. 8(5), pages 537-572, December.
    18. Ariane Szafarz, 2015. "Market Efficiency and Crises:Don’t Throw the Baby out with the Bathwater," Bankers, Markets & Investors, ESKA Publishing, issue 139, pages 20-26, November-.
    19. Robert E. Hall, 2002. "Industry Dynamics with Adjustment Costs," NBER Working Papers 8849, National Bureau of Economic Research, Inc.
    20. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2714. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.