Puzzles in international finance: Portfolio diversification and debt maturity

Abstract:

The aim of this thesis is to contribute to the understanding of two features of international financial markets: the home bias in country portfolios and the existence of short term lending to finance long term projects in emerging markets. I discuss each in turn. One of the empirical regularities standard models cannot explain is the strong bias of investor’s portfolio towards domestic securities. This empirical regularity contradicts the large gains from diversification modern finance theory pbkp_redicts. Theoretical models of portfolio choice in closed economy usually neglect the effect of the macroeconomic fluctuations since there is no reason, at least a priori, to think that these fluctuations affect investors differently. In open economies this simplification might produce important mistakes. In the international financial markets investors belonging to different countries face different macroeconomic conditions and therefore they take distinct investment decisions.

Año de publicación:

2008

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Fuente:

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