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One Proposition about Dynamic Portfolio Selection in an Open Economy and International Diversification

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  • Aoki, Takaaki

Abstract

This paper describes one proposition about dynamic Markowitz portfolio selection in an open economy. Here it is proved that, assuming that two countries in an open economy share the same risk absolute aversion coefficient and the same information set with some conditions, the portfolio each country holds always attains the same rate of return, regardless of the characteristics of each country’s risky asset market, of the proportion in each country’s personal asset holdings, of the characteristics of the exchange rate price process, or of the risk free rate in each country. One basic implication of this proposition is that, when two countries share the common information set, each country might be, under these non-general conditions, indifferent, regarding the allocation of home/foreign risky assets, to the diffusion of exchange rate price process. Finally, I discuss another implication of this proposition in the relation with international portfolio diversification and so called “the home bias puzzle”.

Suggested Citation

  • Aoki, Takaaki, 2008. "One Proposition about Dynamic Portfolio Selection in an Open Economy and International Diversification," MPRA Paper 20563, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:20563
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    References listed on IDEAS

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    1. Coakley, Jerry & Fuertes, Ana-Maria & Smith, Ron, 2006. "Unobserved heterogeneity in panel time series models," Computational Statistics & Data Analysis, Elsevier, vol. 50(9), pages 2361-2380, May.
    2. Imed Drine & Christophe Rault, 2008. "Purchasing Power Parity For Developing And Developed Countries. What Can We Learn From Non‐Stationary Panel Data Models?," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 752-773, September.
    3. Christophe Rault, 2007. "Purchasing Power Parity for Developing and Developed Countries: What can we learn from Non-Stationary Panel Data Models," Post-Print halshs-00206153, HAL.
    4. Sofia Babilis & Valpy Fitzgerald, 2005. "Risk Appetite, Home Bias and the Unstable Demand for Emerging Market Assets," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(4), pages 459-476.
    5. I. Drine & Christophe Rault, 2007. "Purchasing Power Parity for developing and developed. What can we Learn from Non-Stationary Panel Data Models?," Post-Print halshs-00202773, HAL.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Dynamic portfolio selection; Open economy; Common information sharing; Home bias puzzle;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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