Essays on behavioral international finance and global asset allocation

This dissertation is comprised of three essays. The first one analyzes the risk and return relationship of a China country index if it were included in an international portfolio. The other two focus on reviewing the existing state of behavioral international finance literature, and on testing behavioral finance theories within the context of the Asian financial crises.; The first essay decomposes the total risk of the MSCI China country index returns into three components: world systematic risks, Asian regional systematic risks and country-specific risks. It suggests the China index's lower than average systematic risks might be one of the explanations for China equity's risk/return mismatch. The China Index's systematic risks, both global and regional, have been increasing, but more so at the global level. It also finds that Asian country index returns mostly respond to shocks originating within the country of origin. South Korea, China and Taiwan index returns are increasingly sensitive to global common shocks, notably after the Asian financial crisis, while Japan and India indices are more responsive to regional shocks. The findings have important implications in explaining relationships between risk and return of an international asset, and in optimally allocating funds within a global versus a regional portfolio.; The second and third essays shift away from traditional finance to concentrate on the study of behavioral international finance. Given that global financial markets are not simple form efficient, there is a growing trend to apply behavioral theories to international finance. The second essay critically reviews the current behavioral international finance literature. It introduces the concept of institution into behavioral finance, intending not merely to broaden the scope within the field, but also to build connections of several interfield studies, such as behavioral finance, new institutional economics and public finance.; As an extension, the third essay tests four behavioral hypotheses: panic, contagion, indifferent risk perception and overreaction, of the Asian financial crises. Test results do not support the pure panic or overreaction theories of the crisis. There was only a mild contagion in Asian bond markets during July-September of 1998 when Russia defaulted its debt. In addition, global investors increased risk premiums to all Asian bonds simultaneously during this period. However, when the crisis originated within the Asian region during 1997 and early 1998, investors' risk perception toward each Asian bond was different. Thus, policies that address both fundamentals and behavioral issues are critical in preventing and protecting a country from crises.