By Heinz Zimmermann
- Reveals new methodologies for asset pricing inside a world asset allocation framework.
- Contains state of the art empirical learn on international markets and sectors of the worldwide economy.
- Introduces the Black-Litterman version and the way it may be used to enhance worldwide asset allocation decisions.
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Finds new methodologies for asset pricing inside of a world asset allocation framework. includes state of the art empirical learn on worldwide markets and sectors of the worldwide economic system. Introduces the Black-Litterman version and the way it may be used to enhance worldwide asset allocation judgements.
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Extra info for Global asset allocation : new methods and applications
However, in contrast to the risk premiums in Ikeda’s (1991) model, these prices include a compensation for exchange rate risk. Recall, in the setting of Solnik (1983b), asset returns are unhedged against exchange rate risk in principle. Consequently, the IntAPT pricing restriction shows up in terms of “total” factor premiums. In fact, if a certain factor structure is assumed to hold for a set of asset returns computed in some numéraire currency, it is implicitly presumed that the evolution of international exchange rates with respect to that currency is consistent with the same factor model.
It is then an empirical question whether these regression coefficients prove to be universal with respect to alternative benchmark currencies. Empirical evidence is provided by Adler and Jorion (1992), Brandenberger (1995), and Müller (2000). Free Lunch and Full Currency Hedging Perold and Schulman (1988) argue that exchange rate risk can be hedged at zero cost—the expected excess return on currency forward contracts is zero, µ F = 0 . 39) In the context of our model, this case emerges if the stock returns are uncorrelated with exchange rate changes: the beta-matrix is 40 GLOBAL ASSET ALLOCATION β = 0 .
In the following, based on Jorion and Khoury (1995), we highlight the main features and implications of the model. To start, we take up the remark of Adler and Dumas (1983) and do not differentiate between foreign stocks (fund 1) and foreign risk-free assets (fund 2) in the characterization of the risky part of portfolio w . The vector of expected excess returns in domestic9 currency is denoted by µ and the variance-covariance matrix of the domestic excess returns is V . λ is the coefficient of relative risk tolerance.