This study develops a model for international portfolio choice in the presence of the home asset with event-risk versus foreign asset with stochastic information filtering. The model is constructed from comparing the portfolio fraction changes of domestic assets so as to maximize the expected utility of his terminal wealth by the relative standard deviation on both foreign and home asset returns. We provide a more accurate analysis on international portfolio choice when the home asset suffers a tremendous change in political issue or economic event to a certain level; the investors decrease the proportion of home asset and increase the proportion of foreign asset. The numerical result shows that home bias holds when the home event risk does not happen. Also when there is the home event risk, the relative standard deviation on both asset returns and the jump size play a deterministic role on portfolio weights.
[...] In Table throughout the calculation, by differentiating the investor terminal wealth with * and with respect to the risk aversion parameter respectively, the investors take the portfolio choice as significant foreign bias under the condition 1 and risk 2 respect to portfolio weight aversion parameter from 0.5 to 5 with one jump a year and jump size - 0.5 as the static result 0 For the same condition when jump-frequency increases to 10 years, the investor takes the portfolio decision on home bias ( ) except risk aversion 0.5 with 0.5 * f = 1.5 which home portfolio weight * However, under previous conditions the optimal portfolio weight on home asset with respect to the parameters implies the comparative static result as To illustrate this result, Figure 1 graphs the optimal portfolio weight on home asset as a function of the size of price jumps for risk aversion 0.5 on Panel A and and f and 10 respectively, as for risk aversion 3 on Panel C and f = 2. [...]
[...] Because information is not sufficiently transparent to foreign assets, the ratio of standard deviation on foreign asset return to the standard 1 f F deviation on home asset returns becomes greater than one implies the relationship f * f , where 1 between home portfolio weight and the ratio being the formula as If the ratio of standard deviation on both asset returns f increases to the limit, f and there 1 1 ( / 2 is no short position, then the optimal home portfolio weight approaches to one, Otherwise, borrowing policy can be accepted, and then the optimal home portfolio weight will be greater than one, holds. [...]
[...] Fourthly, for the event jump related parameters, the basic concept has evidence on positive relationship with home events jump-size and home portfolio weights if jump-size is negative, and there is a negative relationship with home events jump-size and home portfolio weights if jump-size is greater than zero. Finally, we observed that a portfolio selection decision is clearly affected by both ratio of return standard deviations and jump-frequency parameters, but risk aversion of investor is trivial. References Adler, M., Dumas, B International portfolio choice and corporation finance: A synthesis. [...]
[...] After the barriers to international investment have fallen, researchers have put more emphasis on examining the obstacles to foreign investment; it is worthy comparing with the home political or economic instability. More important are information asymmetries that owe to the poor quality and low credibility of financial information in many countries. Kang and Stulz (1997) suggest two main classes of such barriers are political risk differences faced by the domestic and the foreign investors and the information asymmetries. They provide evidence while a direct measure of information costs is impossible; some foreign firms have reduced these costs by publicly listing their securities in the United States, where investor protection regulations elicit standardized, and credible financial information. [...]
[...] We show this result by numerical evidence in next section Numerical Results In this section, we analyze the implications of home event-related jump parameters, ) , j , versus foreign information filtering diffusion parameter f ) , for portfolio choice by * To find the effect of differentiating i et ' t m nl el wt r pc t n s r e i w ah i e etoportfolio weight v os r a t h s jump size, we set risk aversion be 0.5 (represents extreme risk-avert investors) and 3.0 (represents risk-liking investors, some literature use 5 instead)), the volatility of diffusive returns held fixed at 15 percent ( and frequency of jumps be 1,5,10 and 100 years in Table 1. [...]
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