This paper proposes and investigates a multivariate 4/2 Factor Model. The name 4/2 comes from the superposition of a CIR term and a 3/2-model component. Our model goes multidimensional along the lines of a principal component and factor covariance decomposition. We find conditions for...

We develop a model of international portfolio choice in complete and incomplete markets with stochastic covariance between financial asset returns and exchange rates. The optimal investment strategies are derived in closed form. We estimate the model parameters and illustrate the optimal...