forecasting the exchange rate a monetary or random walk phenomenon abstract this paper evaluates the forecasting accuracy of monetary and random walk models of the exchange rate instrumental variable estimates of the simple monetary model are not supported by the data while the full information maximum liklihood estimates of its rational expectations counterpart are the rational expectations monetary model is operationalized using the results of hansen and sargent 1980 and flavin 1981 and box jenkins time series techniques monthly data on the us and uk economics over the recent flexible exchange rate period serve as the case study

the monetary approach to exchange rate determination under rational expectations the dollar deutschmark rate abstract this paper reformulates the monetary approach after ascertaining that a money demand function with a partial adjustment mechanism had more empirical support than a money demand function which assumed instantaneous stock adjustment the resulting exchange rate equation is estimated by two rational expectations techniques the parameter estimates are reasonable and are robust to the estimation technique used to different specifications of the driving processes and to changes in the estimation period the structural model outperforms the random walk model and its own unconstrained equivalent a pure time series equation in outof sample forecasts

the changing empirical definition of money some estimates from a model of the demand for money substitutes interest bearing checkable deposits are examined to test whether they should be included in measures of the u s money stock both divisia and traditional simple sum aggregates are constructed on the basis of tests for weak separability in a model of the demand for financial assets using nonparametric demand analysis we find that several groups of assets are compatible with aggregation theory we find empirical support for a narrow measure consisting of the components of current mia in tests based on a st louis equation and in terms of controllability a divisia aggregate performs better than the simple sum mia measure

seasonal flutuations and equilibrium models of exchange rate most of the evidence on dynamic equilibrium exchange rate models is based on seasonally adjusted consumption data equilibrium models have not worked well in explaining the actual exchange rate however the use of seasonally adjusted data might be responsible for the spurious rejection of the model this article presents a new equilibrium model for the exchange rates that incorporates seasonal preferences the fit of the model to the data is evaluated for five industrialized countries using seasonally unadjusted data our findings indicate that a model with seasonal preferences can generate monthly time series of the exchange rate without seasonality even when the variables that theoretically determine the exchange rate show clear seasonal behaviours further the model can generate theoretical exchange rates with the same order of integration than actual exchange rates and in some cases with the same stochastic trend

term premia on euro rates there are at least two statistically firm results regarding international money and capital markets the first is the theory of interest rate parity is empirically valid for euro interest rates 8 the second is forward exchange rates are poor very likely biased predictors of future spot exchange rates 1 3 10 12 13 the former is a comforting finding in that it assures there are no unexploited arbitrage profits the latter is troubling to some because it might be a symptom of an inefficient market that interest rate parity holds suggests international exchange and money market arbitrageurs are fully exploiting all profit opportunities they are behaving rationally that forward exchange rates fail to predict future spot rates at least unbiasedly suggests the existence of some unknown mechanism which robs predictive ability in a naive rational expectations view of the world the failure of forward rates to be unbiased predictors of future spot rates implies either that there is some difference between interest rate pairs other than inflationary expectations or that forward rates do not capture expected inflation differences in any simple way see 9 this paper addresses the first issue if there are differences in interest rate pairs which do not solely reflect expected inflation divergences this must show up as a difference in real interest rates such could be the result of actual instantaneous real rates of identical risk being unequal in magnitude or what is more likely differences in term premia between interest rate pairs when periods greater than say one day are used in interest rate parity and forward rate prediction tests if there are differential term premia in interest rate pairs of say one month or longer then forward exchange rates will mispredict the future spot exchange rate by that margin

exchange rates financial innovation and divisia money the sterling dollar rate 1972 1990 in this paper we examine the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using as a convenient framework the monetary model of the exchange rate we demonstrate inter alia that for the sterling us dollar exchange rate over the period 1972 q1 to 1990 q2 that the use of divisia money makes a significant difference to both the long and short run modelling of the exchange rate

industry rotation in the u s stock market 1934 1986 returns on passive semi passive and active strategies abstract this paper compares the returns to three distinct sets of approaches to industry rotation in the u s stock market passive semi passive and active using the 12 industry breakdown of breeden gibbons and litzenberger 1989 the passive strategies are based on the up and down levered value weighted industry indices and the semi passive strategies are similarly constructed from the equal weighted industry indices the active strategies are based on multiperiod investment theory and the empirical probability assessment approach applied to past realized returns the semi passive and active strategies performed well in both the full 1934 1986 period and in the 1966 1986 subperiod achieving statistically significant excess returns in several instances

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

massaging mean variance inputs returns from alternative global investment strategies in the 1980s this paper explores the impact of adjustments to the inputs on total returns terminal wealth and portfolio turnover in an unconstrained monthly mean variance mv asset allocation over time it is well known that mv allocations are very sensitive to small forecast errors in the means and covariances this sensitivity is especially pronounced for errors in means one way to control this sensitivity to forecast errors is to use stein estimation we examined three naive applications of stein estimation for six individual country stock indexes five country bond indexes and five cash indexes this study has two major conclusions first any of the suggested adjustments to inputs dominate the results of an unadjusted input mv optimization adjusted input portfolios have higher mean return less variance and greater terminal wealth than unadjusted input portfolios second these improvements become even greater with transaction costs

monetary integration and currency substitution in the ems the case for a european monetary aggregate abstract this paper examines the phenomenon of cross currency substitution and the validity of monetary aggregation within the european monetary system using non parametric methods which exploit the relationship between intergroup substitution and separability the separability property is tested using the methodology developed by varian the nonparametric approach to demand analysis econometrica 50 945 974 1982 nonparametric tests of consumer behaviour review of economic studies 51 99 110 1983 and is violated in the case of most european countries suggesting that the hypothesis of zero currency substitution which forms the basis of national monetary aggregation should be rejected the results do however validate the use of monetary aggregates for the ems as a whole and i use a standard parametric demand for money approach to compare the performance of an ems divisia index with that of simple sum aggregates during the 1980s and 1990s

modeling the ecu against the u s dollar a structural monetary interpretation the proposal that a reformed international monetary system be designed around currency blocs has gained some popularity of late in europe the formation of the euro formalizes the existence of a dm based currency block little academic research has been conducted however on the properties of composite currencies such as the euro in this article we examine the properties of the precursor to the euro namely the ecu against the u s dollar using a monetary framework the article has several novel features our modeling strategy involves starting with underlying equilibrium conditions rather than a final reduced form uses divisia money rather than the more conventional simple sum money interprets in an economic sense the long run relationships and produces an appealing forecasting performance

portfolio turnpike theorems risk aversion and regularly varying utility functions models which incorporate both uncertainty and the dynamic behavior of economic agents are difficult to analyze 2 moreover even when a solution is obtained it can seldom be simply stated and rarely lends itself to straightforward interpretations an example of an appealingly understood result is a turnpike theorem which states that if the planning horizon is distant then the optimal policy can be approximated by a wealth independent policy our paper develops an analogous result in a stochastic intertemporal model of portfolio selection in fact we obtain necessary and some sufficient conditions for a turnpike the problem considered in this essay is that of an investor a von neumannmorgenstern expected utility maximizer who invests for a finite horizon and consumes only his terminal wealth at the beginning of the first period the investor allocates his wealth w among various assets and at the end of the first

efficient exchange rate forecasts lagged models better than the random walk abstract the evidence of meese amd rogoff 1983 on the out of sample forecasting performance of structural exchange rate models in comparison to the random walk model portrays a disappointing picture of structural models this paper re considers the issue for the german mark for an updated period to include a larger set of structural models and lagged adjustment besides out of sample evidence in sample evidence is also examined we conclude that while some stuctural models dominate the random walk a lagged adjustment consideration can contribute towards better performance

a half century of returns on levered and unlevered portfolios of stocks bonds and bills with and without small stocks in two earlier papers grauer and hakansson 1982 grauer and hakansson 1984 we applied the multiperiod portfolio theory of mossin 1968 hakansson 1971 1974 leland 1972 ross 1974 and huberman and ross 1983 to the construction and rebalancing of portfolios composed of u s stocks corporate bonds government bonds and a risk free asset borrowing was ruled out in the first article while margin purchases were permitted in the second the probability distributions used were naively estimated from past realized returns in ibbotson this paper applies multiperiod portfolio theory to the construction and rebalancing of portfolios composed of u s stocks corporate bonds government bonds and a risk free asset with small stocks included as a separate investment vehicle probability assessments are based on the past joint empirical distribution our principal findings are 1 small stocks while totally ignored at times entered even the most riskaverse portfolios most of the time and 2 small stocks when chosen tended to replace common stocks except in the 1970s and early 1980s when they were primarily held in lieu of the risk free asset presented at the australian graduate school of management and at macquarie university both in sydney southern methodist university duke university the university of southern california the london graduate school of business and the annual meeting of the western financo association in scottsdale arizona the authors thank the participants of these seminars especially michael brennan and ehud ronn for helpful comments financial support from the social sciences and humanities research council of canada and the financial research foundation of canada is gratefully acknowledged the authors also wish to thank changwoo lee for research assistance and are greatly indebted to frederick shen for computational assistance

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

testing the validity of the monetary model for asean with structural break this study examines the validity of the long run structural relations underlying the monetary exchange rate model for malaysia singapore the philippines and thailand take into consideration the possibility of structural change we examined the models using recent developed techniques of testing unit root and cointegration with a structural break our findings of three cointegrating relations among the variables in the system were further identified by testing theoretical restrictions on the cointegrating equations the long run relationships were able to be interpreted according to the theory hence support the long run validity of the monetary exchange rate model

time varying parameters and the out of sample forecasting performance of structural exchange rate models varying parameter estimation techniques based on recursive application of the kalman filter are used to improve the predictive performance of a class of monetary exchange rate models i find that allowing estimated parameters to vary over time enhances the models forecasting performance for the dollar pound dollar mark and dollar yen exchange rates contrary to earlier results in the literature ex post forecasts for the dollar mark rate compare favorably with those obtained from the naive random walk forecasting rule

testing for bubbles in exchange markets a case of sparkling rates this paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles when a new econometric methodology for detecting asset market bubbles is used the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar deutsche mark and dollar pound ratesusing monthly data over the period 1973 82 additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care

monetary and exchange rate policies for international financial stability a proposal w v ithout a common monetary standard the remarkable integration of western european north american and the industrialized asian economies in both commodity trade and financial flows is less efficient and becoming untenable dissatisfaction with wildly fluctuating relative currency values euphemistically called floating or flexible exchange rates is a prime cause of the resurgence in protectionism in 1986 87 the overvalued yen forced japanese industrialists to close factories retire workers and write off once valuable investments in plant and equipment this parallels what their american counterparts were forced to do between 1981 and 1985 when the dollar suddenly became overvalued similarly the paring down of the british manufacturing base was precipitated when the pound unexpectedly became a strong petrocurrency in 1979 81 in agriculture japan and european countries are determined to insulate their domestic prices of farm products from unsettling international influences including volatile fluctuations in the yen dollar or mark dollar exchange rates thus unless exchange stability is first achieved the american government s attempt to broaden the general agreement on tariffs and trade to encompass agriculture and services is likely to fail but what keeps the three major industrial blocs from developing a common monetary standard to prevent exchange rate fluctuations although many people

do constraints improve portfolio performance the discrete time dynamic investment model using only historical data in various asset allocation settings often produces significant abnormal returns however the model does not choose the diversified portfolios that theory suggests it should therefore in this paper we compare the investment policies and returns of the model with and without constraints on the mix of risky assets the constraints lead to appreciably more diversification and less realized risk but only at the cost of less realized return visual comparisons of compound return standard deviation plots and statistical comparisons of jensen s alpha suggest that the reduction in return is not worth the reduction in risk for more risk averse investors ex post utility and certainty equivalent returns suggest that it is the results however illustrate the problems associated with using ex post utility to measure performance 2000 elsevier science b v all rights reserved

foreign exchange market interventions and the exchange rate in the long run this article examines whether foreign exchange market interventions conducted by the bank of japan are important for the dollar yen exchange rate in the long run we rely on a re examination of the empirical performance of a monetary exchange rate model this is basically not a new topic however we focus on two new questions first does the consideration of periods of massive interventions in the foreign exchange market uncover a potential long run relationship between the exchange rate and its fundamentals second do forex interventions support the adjustment towards a long run equilibrium value our results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long run relationship to a significant degree furthermore forex interventions increase the speed of adjustment towards long run equilibrium in some periods particularly in periods of coordinated forex interventions our results indicate that only coordinated inter

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

long run purchasing power parity is it for real in this paper we re examine the purchasing power parity concept using data from the recent experience with floating exchange rates in particular we utilise the recently developed multivariate cointegration methodology to test for a long run relationship between exchange rates and relative prices and also to test for the proportionality of the exchange rate with respect to relative prices in contrast to much other research we demonstrate that there is a long run relationship between a number of bilateral u s dollar exchange rates and their corresponding relative prices the proportionality of the exchange rate to relative prices does not however receive support from the data this finding may be attributable to the use of measured price series rather than the true series

a stable us money demand function 1874 1975 we apply recent econometric techniques to the demand for money in the united states over a period of some hundred years using data previously analyzed by friedman and schwartz 1982 our results parallel those of hendry and ericsson s 1991 uk study we find evidence of a unique long run money demand function and of a stable short run demand function which passes a range of diagnostic tests and exhibits parameter constancy also parameter non constancy in an inverted equation where prices appear as the dependent variable is inconsistent with the hypothesis of exogenous money determining prices through the money demand function

error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting the proposition that dynamic exchange rate models can outperform the random walk in out of sample forecasting in the sense that they produce lower mean square errors is examined and disputed by using several dynamic versions of three macroeconomic exchange rate models it is demonstrated that dynamic specifications outperform the corresponding static models but improvement in the forecasting power may not be sufficient for the dynamic models to perform better than the random walk the results are explained by suggesting that any dynamic specification or transformation of the static model leads to the introduction of a lagged dependent variable which in effect is a random walk component the analysis leads to the conclusion that it is implausible to aim at beating the random walk by augmenting a static model with a random walk component

stochastic network programming for financial planning problems several financial planning problems are posed as dynamic generalized network models with stochastic parameters examples include asset allocation for portfolio selection international cash management and programmed trading arbitrage despite the large size of the resulting stochastic programs the network structure can be exploited within the solution strategy giving rise to efficient implementations empirical results are presented indicating the benefits of the stochastic network approach for the asset allocation case

real versus nominal forecast errors in the prediction of foreign exchange rates abstract imposing a small number of common but strong assumptions allows the varianve of the ex post forecast error in forward exchange rates to be decomposed into its parts that part due to errors in forecasting relative inflation the nominal error and that part due to real shocks for a sample of large and small industrial countries we show that real shocks have been predominant in the post bretton woods world this result implies that models of exchange rate determination which do not explicitly incorporate real shocks are inappropriate for explaining recent exchange rate volatility

cointegration tests of purchasing power parity the case of swiss exchange rates abstract this paper tests purchasing power parity ppp as a long run equilibrium condition by examining the long run relationshiop between exchange rates and wholesale price indices using cointegration tests this paper avoids some of the problems of previous cointegration tests of ppp by using more precise data pretests and by not imposing a priori restrictions upon the cointegrating vector of the nine combinations of swiss exchange rates and price indices examined cointegration is detected in seven cases thus supporting ppp as a long run equilibrium jel f31 c32

sensitivity analysis for mean variance portfolio problems this paper shows how to perform sensitivity analysis for mean variance mv portfolio problems using a general form of parametric quadratic programming the analysis allows an investor to examine how parametric changes in either the means or the right hand side of the constraints affect the composition mean and variance of the optimal portfolio the optimal portfolio and associated multipliers are piecewise linear functions of the changes in either the means or the right hand side of the constraints the parametric parts of the solution show the rates of substitution of securities in the optimal portfolio while the parametric parts of the multipliers show the rates at which constraints are either tightening or loosening furthermore the parametric parts of the solution and multipliers change in different intervals when constraints become active or inactive the optimal mv paths for sensitivity analyses are piecewise parabolic as in traditional mv analysis however the optimal paths may contain negatively sloping segments and are characterized by types of kinks i e points of nondifferentiability not found in mv analysis

co integration tests for long run equilibrium in the monetary exchange rate model abstract the monetary model of exchange rate determination is tested as a long run equilibrium relation tests of co integration among the variables in this model over a wide range of specifications are generally unfavorable to the monetary approach

testing the long run structural validity of the monetary exchange rate model using a recently developed econometric technique we test the validity of the over identifying restrictions of the long run structural relations underlying the flex price monetary model of the exchange rate our main finding is that for the canadian us dollar structural identification is rejected by the data

limiting losses may be injurious to your wealth abstract theory tells us that if return distributions are independent over time an expected utility maximizing logarithmic utility investor will almost surely accumulate the most long run wealth this paper examines the robustness of the result specifically it examines the expected and unexpected long run and short run consequences of imposing value at risk and other loss constraints on power utility investors with a numerical example and empirically in an asset allocation setting covering the 1934 2008 period in addition it examines the expected and unexpected long run consequences of imposing conditional value at risk constraints on power utility and prospect theory kinked linear utility investors

banking on currency forecasts how predictable is change in money abstract the paper examines the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques error correction versions of the models are fit so that plausible long run elasticities can be imposed on the fundamental variables of each model a variety of model evaluation statistics are reported our findings confirm that fundamental exchange rate models forecast no better than a random walk model for short term prediction horizons for longer horizons error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies we consider

back testing the performance of an actively managed option portfolio at the swedish stock market 1990 1999 we build an investment model based on stochastic programming in the model we buy at the ask price and sell at the bid price we apply the model to a case where we can invest in a swedish stock index call options on the index and the risk free asset by reoptimizing the portfolio on a daily basis over a ten year period it is shown that options can be used to create a portfolio that outperforms the index with ex post analysis it is furthermore shown that we can create a portfolio that dominates the index in terms of mean and variance i e at given level of risk we could have achieved a higher return using options

persistence in foreign exchange rates abstract this study examines the long run behavior of seven daily nominal exchange rates using univariate and multivariate persistence measures our results indicate that for some currencies the long run behavior deviates from that of a pure random walk in certain periods the multivariate estimates reflect the effect of both the ems exchange rate mechanism and increased post louvre accord coordinated intervention a large portion of the effect of a shock in one currency on another currency s long run value can be attributed to contemporaneous effects on the other currencies

exchange rate predictability and monetary fundamentals in a small multi country panel in this paper a panel of vector error correction models based on a common long run relationship is utilized to test whether the euro exchange rates of canada japan and the united states have a long run link with monetary fundamentals we use both exchange relationships relative to the full emu area with synthetic aggregates for the pre emu period and relative to germany solely compared to existing cointegration frameworks our approach provides more evidence that the aforementioned exchange rates are consistent with a rational expectations based monetary exchange rate model based on a common long run relationship albeit with a long run impact of relative income that is higher than predicted by the theory as a next step we analyze the out of sample fit of this common long run exchange rate model relative to naive random walk based forecasts these forecasting evaluations indicate that the monetary fundamentals based common longrun model is superior to both random walk based forecasts and standard cointegrated var model based forecasts especially at horizons of 2 to 4 years

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

a long run structural macroeconometric model of the uk a new modelling strategy that provides a practical approach to incorporating long run structural relationships suggested by economic theory in an otherwise unrestricted var model is applied to construct a small quarterly macroeconometric model of the uk estimated over 1965q1 1999q4 in nine variables domestic and foreign outputs prices and interest rates oil prices the nominal effective exchange rate and real money balances the aim is to develop a model with a transparent and theoretically coherent foundation tests of restrictions on the long run relations of the model are presented the dynamic properties of the model are discussed and monetary policy shocks identified

regime shifts and the canada us exchange rate in a multivariate framework this study re evaluates the monetary approach for the canada u s exchange rate and shows that its basic structure can be verified although the coefficients are not consistently in line with theory our findings also indicate that exchange rate adjustment is subject to regime shifts

gains from international diversification 1968 85 returns on portfolios of stocks and bonds this paper applies the multi period investment model to a universe of international securities on the basis of the simple probability assessment approach our principal findings are 1 the gains from including non u s asset categories in the universe were remarkably large in some cases statistically significant especially for the highly risk averse strategies 2 the gains from removing the no leverage constraint were more substantial than they were in the absence of non u s securities and 3 there is strong evidence of market segmentation in that the optimal levels of investment in u s securities were mostly zero in the presence of the non u s asset categories