 International portfolio selection with exchange rate risk: A behavioural portfolio theory perspectiveChonghui Jiang, Yongkai Ma and Yunbi An Journal of Banking & Finance, 2013, vol. 37, issue 2, 648-659 Abstract: This paper analyzes international portfolio selection with exchange rate risk based on behavioural portfolio theory (BPT). We characterize the conditions under which the BPT problem with a single foreign market has an optimal solution, and show that the optimal portfolio contains the traditional mean–variance efficient portfolio without consideration of exchange rate risk, and an uncorrelated component constructed to hedge against exchange rate risk. We illustrate that the optimal portfolio must be mean–variance efficient with exchange rate risk, while the same is not true from the perspective of local investors unless certain conditions are satisfied. We further establish that international portfolio selection in the BPT with multiple foreign markets consists of two sequential decisions. Investors first select the optimal BPT portfolio in each market, overlooking covariances among markets, and then allocate funds across markets according to a specific rule to achieve mean–variance efficiency or to minimize the loss in efficiency. Keywords: International portfolio selection; Exchange rate risk; Behavioural portfolio theory; Mean–variance efficiency (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:2:p:648-659 DOI: 10.1016/j.jbankfin.2012.10.004 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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