International Portfolio Choice with Frictions: Evidence from Mutual Funds

Philippe Bacchetta, Simon Tièche and Eric van Wincoop
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Eric van Wincoop: University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

No 20-46, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Using data on international equity portfolio allocations of US mutual funds, we estimate a simple portfolio expression derived from a standard Markowitz mean-variance portfolio model extended with portfolio frictions. The optimal portfolio depends on two benchmark portfolios, the previous month and the buy-and-hold portfolio shares, and a present discounted value of expected future excess returns. We show that equity return differentials are predictable and use the expected return differentials in the mutual fund portfolio regressions. The estimated reduced form parameters are related to the structural model parameters. The estimates imply significant portfolio frictions and a modest rate of risk-aversion. While mutual fund portfolios respond significantly to expected returns, portfolio frictions lead to a weaker and more gradual portfolio response to changes in expected returns. We also document heterogeneity across funds. Global and larger funds face bigger portfolio frictions, while more active funds give relatively less weight to the buy-and- hold portfolio (rebalance more aggressively).

Pages: 44 pages
Date: 2020-06
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: International Portfolio Choice with Frictions: Evidence from Mutual Funds (2023)
Working Paper: International Portfolio Choice with Frictions: Evidence from Mutual Funds (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2046

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