Article: article from journal or magazin.
Some Models of the International Capital Market
European Economic Review
The original feature of international portfolio theory is that it considers investors of different countries who look at returns differently from each other because of deviations from Purchasing Power Parity. Its purposes are: (i) to explain the different portfolio compositions of investors of different countries, (ii) to explain the structure of expected returns across securities worldwide. I show here that this theory fails on the first count (‘home equity bias’) but may still have some potential on the second count. I also discuss some results of general-equilibrium models of the international economy that incorporate frictions.
Financial equilibrium, Capital asset pricing model, Exchange risk
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