This paper focuses on the role of real exchange rate volatility as a driver of portfolio home bias, and in particular as an explanation for differences in home bias across financial assets. We present a Markowitz-type portfolio selection model in which real exchange rate volatility induces a...

Foreign exchange reserve accumulation has risen dramatically in recent years. The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away...

This paper shows how the problem of mean-downside risk portfolio allocation can be cast in terms of penalized least squares (PLS). The penalty is given by a power function of the returns below a certain threshold. We derive the asymptotic properties of the PLS estimator, allowing for possible...

Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated. While it could be important for...

This paper examines a continuous-time intertemporal consumption and portfolio choice problem for an ambiguity-averse investor with multiple priors when the expected return of a risky asset is unobservable and follows a hidden Markov chain. The investor's beliefs over investment opportunities are...

The 2007-2008 financial crises has made it painfully obvious that markets may quickly turn illiquid. Moreover, recent experience has shown that distress and lack of active trading can jump around between seemingly unconnected parts of the financial system contributing to transforming isolated...

This study explores the information content of HML and SMB by linking the Fama-French factors to shocks in the state variables which predict future investment opportunities. It shows that the HML factor contains information about shocks to default spread. Moreover, the Fama-French model explains...

We develop a finite-sample procedure to test the beta-pricing representation of linear factor pricing models that is applicable even if the number of test assets is greater than the length of the time series. Our distribution-free framework leaves open the possibility of unknown forms of...

Asymmetric shocks are common in markets; securities'; payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices. A three funds separation theorem...

The early work of Tobin (1958) showed that portfolio allocation decisions can be reduced to a two stage process: first decide the relative allocation of assets across the risky assets, and second decide how to divide total wealth between the risky assets and the safe asset. This so called...