Review of Financial Studies Vol. 36 No. 10 2023

International Portfolio Choice with Frictions: Evidence from Mutual Funds

Philippe Bacchetta¹; Simon Tièche²; Eric van Wincoop³

¹ University of Lausanne, Swiss Finance Institute, and CEPR , Switzerland · ² Ecole Polytechnique Fédérale de Lausanne (EPFL) , Switzerland · ³ University of Virginia and NBER , USA

Abstract

Using data on international equity portfolio allocations by U.S. mutual funds, we estimate a portfolio expression derived from a standard mean-variance portfolio model extended with portfolio frictions. The optimal portfolio depends on the previous month and the buy-and-hold portfolio shares, and a present discounted value of expected excess returns. We estimate expected return differentials and use them in the portfolio regressions. The estimates imply significant portfolio frictions and a modest rate of risk aversion. While mutual fund portfolios significantly respond to expected returns, portfolio frictions lead to a weaker and a more gradual portfolio response to changes in expected returns.

DOI

10.1093/rfs/hhad027

Volume

36

Issue

10

Pages

4233-4270

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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