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

Economics Bulletin, 2008, vol. 6, issue 18, pages 1-8

Abstract: This paper describes one proposition about dynamic Markowitz portfolio selection in a two-country 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 any other symmetric/asymmetric characteristics of the open economy. 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 calledgthe home bias puzzleh.

Keywords: Dynamic Portfolio Selection; Open Economy; International Diversification; Home Bias Puzzle (search for similar items in EconPapers)
JEL-codes: F3 D8 (search for similar items in EconPapers)
Date: 2008-04-21

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