International portfolio selection with exchange rate risk: A behavioural portfolio theory perspective
Yongkai Ma and
Journal of Banking & Finance, 2013, vol. 37, issue 2, 648-659
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)
JEL-codes: G11 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:2:p:648-659
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Series data maintained by Dana Niculescu ().