Parameter Uncertainty and International Investment in a Multi-Period Setting

53 Pages Posted: 11 Jul 2001

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Ludan Liu

affiliation not provided to SSRN

Date Written: October 2004

Abstract

We consider: i) a dynamic investor who rebalances over time, treats returns as i.i.d., and accounts for learning, and ii) a static buy-and-hold investor who is aware of predictability and estimation risk. Both investors are internationally diversified and combine information on long- and short-history markets using cross-inference. For a dynamic investor, cross-inference generates separate hedging demands, and learning may generate positive hedging demands. For a static investor, some risky-asset allocations may decrease when estimation risk is ignored. Ignoring cross-inference, learning, and estimation risk, can generate sizable utility costs. Optimal investment in emerging markets, substantial in 1994, essentially drops to zero in 2000.

JEL Classification: G11, G15

Suggested Citation

Balduzzi, Pierluigi and Liu, Ludan, Parameter Uncertainty and International Investment in a Multi-Period Setting (October 2004). EFA 2001 Barcelona, Available at SSRN: https://ssrn.com/abstract=276494 or http://dx.doi.org/10.2139/ssrn.276494

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
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Ludan Liu

affiliation not provided to SSRN