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Which demands affect optimal international portfolio choices?

Authors
Journal
Journal of International Financial Markets Institutions and Money
1042-4431
Publisher
Elsevier
Volume
22
Issue
5
Identifiers
DOI: 10.1016/j.intfin.2012.07.005
Keywords
  • Exchange Rate Risk
  • Asset Allocation
  • Stochastic Model

Abstract

Abstract This study analyzes the asset allocations of simple international portfolios that include domestic risky assets, foreign risky assets, and domestic risk-free bonds, through a theoretical analysis. A close-form solution for the optimal holding rates is derived, and can be further sub-divided into three categories of demand: speculative demand, diversified demand, and hedging demands. We carefully explore the essential problem of identifying the underlying reasons for asset allocations, which in turn allows us to answer the question of which of these demands are critical in influencing holding changes.

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