Abstract
This paper analyzes international portfolio selection by U.S. banks under floating exchange rates. Stylized facts regarding the size, composition, variability, and maturity structure of banks' portfolios are presented. A model of optimal international diversification is specified and estimated. The regression estimation results are used to assess the correspondence between observed bank behavior and mean-variance optimal portfolio selection and to test for the presence of rational expectations. Cross spectral densities are also estimated in order to highlight significant differences in portfolio demands across currencies and maturities as well as differences in the portfolio behavior of smaller versus larger banks.
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