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Do Asset-Demand Functions Optimize over the Mean and Variance of Real Returns? A Six-Currency Test / Jeffrey A. Frankel, Charles Engel.
- Format:
- Book
- Author/Creator:
- Frankel, Jeffrey A.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w1051.
- NBER working paper series no. w1051
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 1982.
- Summary:
- International asset demands are functions of expected returns.Optimal portfolio theory tells us that the coefficients in this relationship depend on the variance-covariance matrix of real returns.But previous estimates of the optimal portfolio (1) assume expected returns constant and (2) are not set up to test the hypothesis of mean-variance optimization. We use maximum likelihood estimation to impose a constraint between the coefficients and the error variance-covariance matrix. For a portfolio of six currencies, we are able statistically to reject the constraint. Evidently investors are either not sophisticated enough to maximize a function of the mean and variance of end-of-period wealth, or else are too sophisticated to do so.
- Notes:
- Print version record
- December 1982.
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