Abstract
Publisher Summary This chapter discusses that if investment and consumption opportunity sets do not differ across countries, the fact that countries use different currencies has no significant implications for portfolio choice and asset pricing. In this special case, the traditional approaches to portfolio choice and asset pricing apply. Whereas these models perform poorly in predicting asset holdings across countries, they have some success in explaining the cross-sectional variation in conditional expected returns across countries. The chapter describes how the predictions of the traditional models are affected if one allows for differences in consumption opportunity sets as well as the empirical relevance of such an extension of traditional models. The differences in investment opportunity sets are also presented in the chapter. The chapter is concluded by focusing on the weaknesses of this concept and suggested directions for future research.
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