Essays on international asset allocation
This dissertation examines a number of theoretical and practical issues that arise in international asset allocation. This dissertation consists of three essays.
"An Equilibrium Based Asset Allocation Model," presents an asset allocation model that allows for estimation of the elements of the inverse of the variance-covariance matrix of asset returns from market value weights, excess returns, and factors for each constituents of the portfolios. Models representing differences in investors opinion regarding excess returns, factors affecting returns, and the elements of the inverse of the variance-covariance matrix are derived. A simple proxy for the differences in expected excess returns is presented and found that this method appears to be more reliable and stable than the estimates of expected returns themselves which allows managers to follow conservative or aggressive portfolio policies.
"Nikkei 225 vs. S&P500 Futures: A Comparison of Mispricing Patterns," provides empirical evidence on pricing relationships in the two largest stock index futures markets, the S&P 500 futures in the U.S. and the Nikkei 225 index futures traded in Japan with an emphasis in Japan on arbitrage inventories to market direction and open interest changes contemporaneous with the observed mispricing. This essay differs from most prior research in that trends in valuation are assessed for both the nearby contract and the calendar spread; in particular, the cost/benefit of rolling positions forward reveals the effectiveness of an index futures market in replicating long or short equity exposure on an ongoing basis are incorporated.
"International Interest Rates, Exchange Rates, and Forward Rates, in a Cash-In-Advance Framework," provides a theoretical model for interest rates, exchange rates, and forward rates in the cash-in-advance framework. Using cash-in-advance model, closed-form solutions for the term structure of interest rates, exchange rates, and forward rates in a two country framework are obtained. The closed-form solutions are fairly general and accommodate various shapes of term structure of interest rates. Results show that short-term rates are different due to differences in the stochastic and deterministic components of growth rates in gross domestic products and money supplies, while long-term rates differ due to the deterministic parts of the money supply growth rates.