A debate has raged in the general equilibrium literature on the impact of trade costs on portfolio home bias. In all of these models there is a simple, easily observed covariance-variance ratio. We compute this term using data on real exchange rates and asset returns. The resulting portfolio...

There is widespread evidence of excess return predictability in financial markets. For the foreign exchange market a number of studies have documented that the predictability of excess returns is closely related to the predictability of expectational errors of excess returns. In this paper we...