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International Portfolio Choice with Frictions: Evidence from Mutual Funds

Author

Listed:
  • Philippe Bacchetta
  • Simon Tièche
  • Eric van
  • Ralph Koijen

Abstract

Using data on international equity portfolio allocations by U.S. mutual funds, we estimate a portfolio expression derived from a standard mean-variance portfolio model extended with portfolio frictions. The optimal portfolio depends on the previous month and the buy-and-hold portfolio shares, and a present discounted value of expected excess returns. We estimate expected return differentials and use them in the portfolio regressions. The estimates imply significant portfolio frictions and a modest rate of risk aversion. While mutual fund portfolios significantly respond to expected returns, portfolio frictions lead to a weaker and a more gradual portfolio response to changes in expected returns.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Philippe Bacchetta & Simon Tièche & Eric van & Ralph Koijen, 2023. "International Portfolio Choice with Frictions: Evidence from Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 36(10), pages 4233-4270.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:10:p:4233-4270.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad027
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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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