Parameter Uncertainty and International Investment in a Multi-Period Setting

We consider: i) a “dynamic” investor who rebalances over time, treats returns as i.i.d., and accounts for learning; ii) a “static” buy-and-hold investor who is aware of predictability and estimation risk. Both investors are internationally-diversified and combine information on longand short-history markets using cross-inference. For a dynamic investor, cross-inference generates separate hedging demands, and learning may generate positive hedging demands. For a static investor, some riskyasset allocations may decrease when estimation risk is ignored. Ignoring cross-inference, learning, and estimation risk, can generate sizable utility costs. Optimal investment in emerging markets, substantial in 1994, essentially drops to zero in 2000.