Working Paper: NBER ID: w4645
Authors: René M. Stulz
Abstract: In general, theories of portfolio choice and asset pricing let investors differ at most with respect to their preferences, their wealth and, possibly, their information sets. If there are multiple countries, however, the investment and consumption opportunity sets of investors depend on their country of residence. International portfolio choice and asset pricing theories attempt to understand how the existence of country-specific investment and consumption opportunity sets affect the portfolios held by investors and the expected returns of assets. In this paper, we review these theories within a common framework, discuss how they fare in empirical tests, and assess their relevance for the field of international finance.
Keywords: portfolio choice; asset pricing; international finance
JEL Codes: G11; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of differences in opportunity sets (D10) | consistent portfolio choices across countries (G11) |
| model assumptions (C51) | empirical outcomes (C90) |
| differences in consumption opportunity sets (D10) | expected asset returns (G12) |
| investment barriers (F23) | discrepancies in expected returns (G17) |