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OPTIMAL INTERNATIONAL ASSET ALLOCATION WITH TIME‐VARYING RISK
Author(s) -
Flavin Thomas J.,
Wickens Michael R.
Publication year - 2006
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2006.00394.x
Subject(s) - diversification (marketing strategy) , asset allocation , equity (law) , portfolio , economics , financial economics , asset (computer security) , preference , portfolio allocation , capital asset pricing model , business , monetary economics , microeconomics , computer security , marketing , political science , computer science , law
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 UK investors. There would seem to be more potential gains from increased international diversification for the US than the UK investor.