Which Demands Affect Optimal International Portfolio Choices?

Abstract

This study analyzes the asset allocations of simple international portfolios that include domestic ris ky assets, foreign risky assets, and domestic risk-fre e bonds, through a theoretical analysis. A close-fo rm solution for the optimal holding rates is derived, and can be further sub-divided into three categorie s of demand: speculative demand, diversified demand, and hedging demands. We carefully explore the essential problem of identifying the underlying rea sons for asset holding allocations, which in turn allows us to answer the question of which of these demands are critical in influencing holdi ng changes.