International Portfolio Choice: The Case of Market Competition

Abstract

Purpose – This chapter studies a two-country model in which firms have the opportunity to invest directly both in home and foreign activities while operating in the context of imperfectly competitive markets for final goods and services. The model is an extension of Choi (1989).

Methodology approach – The firm is assumed to maximize the expected utility derived from the sequence of present and future levels of wealth, subject to budget constraint. We apply the Hamilton–Jacobi–Bellman approach.

Findings – In this chapter we show that the degree of imperfect competition may be different in the two countries and measured by the elasticity of the demand functions. In this model, we derive the optimal proportion of foreign investment, which is divided into two ratios. The first ratio is a hedging position. The second one is a speculative position.

Originality – Our model shows the role of alternative finance in the presence of differences between investment in two cases, namely, the case of market competition and the case of no market imperfections. This effect is shown by investment proportion and asset pricing relation.

Citation

Bellalah, M. and Ben Said, S. (2012), "International Portfolio Choice: The Case of Market Competition", Barnett, W.A. and Jawadi, F. (Ed.) Recent Developments in Alternative Finance: Empirical Assessments and Economic Implications (International Symposia in Economic Theory and Econometrics, Vol. 22), Emerald Group Publishing Limited, Leeds, pp. 53-66. https://doi.org/10.1108/S1571-0386(2012)0000022008