International Portfolio Diversification with Generalized Expected Utility Preferences

Joshua Aizenman

Canadian Journal of Economics, 1999, vol. 32, issue 4, 995-1008

Abstract: In this paper we compare the diversification patterns of agents who maximize a generalized expected utility (GEU) with the diversification patterns of agents who follow the CAPM. We consider two identical countries with equity returns having the same mean and variance in terms of their domestic currency but not perfectly correlated. In these circumstances, even a small amount of undiversifiable exchange rate risk would lead to low or zero international diversification among countries if agents maximize GEU, whereas CAPM would imply considerable diversification. Consequently, first-order risk aversion should be added to the explanatory factors that account for the observed diversification patterns.

JEL-codes: F30 F36 (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (8)

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Working Paper: International Portfolio Diversification with Generalized Expected Utility Preferences (1997)
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