Analysis of the phenomenon of preference for domestic securities and implications for international portfolio management.

Summary Motivated by the prospect of greater gains than those expected on the domestic financial market and by the reduction of risk, international diversification constitutes one of the foundations of international financial theory. However, the observation of portfolio composition reveals a clear preference for domestic financial securities. The purpose of this paper is to propose a tangible explanation for this paradox. After presenting the explanations put forward by financial theory in the framework of international asset pricing models (Chap. 1) and highlighting their limitations (Chap. 2), we analyze the role of inflation. We propose two explanations: the heterogeneity of the population and the existence of information acquisition costs on the one hand, and the importance of non-traded goods, in particular human capital, on the other. For each of the proposals, we develop an international asset pricing model and draw conclusions about the optimal composition of portfolios (chapters 3 and 4). Faced with the limits of partial equilibrium, we recall the contributions of international general equilibrium models (chapter 5). We develop an international general equilibrium model where the population is heterogeneous, by proposing a model of information acquisition costs (chapter 5). In order to make deviations from the law of one price endogenous, we use another model and submit an international general equilibrium model with portfolio choice before presenting its conclusions regarding the general composition of portfolios (chapter 6).