publication . Article . 2006

Optimal International Asset Allocation With Time-Varying Risk

Michael R. Wickens; Thomas J. Flavin;
Open Access
  • Published: 01 Jan 2006 Journal: Scottish Journal of Political Economy, volume 53, pages 543-564 (issn: 0036-9292, eissn: 1467-9485, Copyright policy)
  • Publisher: Wiley
  • Country: Ireland
Abstract
This paper examines the optimal allocation each period of an internationally diversified portfolio from the different points of view of a UK and a US investor. We find that investor location affects optimal asset allocation. The presence of exchange rate risk causes the markets to appear not fully integrated and creates a preference for home assets. Domestic equity is the dominant asset in the optimal portfolio for both investors, but the US investor bears less risk than the UK investor, and holds less foreign equity – 20% compared with 25%. Survey evidence indicates actual shares are 6% and 18%, respectively, making the home-bias puzzle more acute for US than U...
Subjects
free text keywords: Economics and Econometrics, Sociology and Political Science, Diversification (marketing strategy), Portfolio, Financial economics, Economics, Investor profile, Diversification (finance), Equity (finance), Foreign exchange risk, Capital asset pricing model, Asset allocation
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