International Diversification at Home and Abroad

Fang Cai and Francis Warnock

No 12220, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It is an established fact that investors favor the familiar—be it domestic securities or, within a country, the securities of nearby firms—and avoid investments that would provide the greatest diversification benefits. While we do not rule out familiarity as an important driver of portfolio allocations, we provide new evidence of investors' international diversification motive. In particular, our analysis of the security-level U.S. equity holdings of foreign and domestic institutional investors indicates that institutional investors reveal a preference for domestic multinationals (MNCs), even after controlling for familiarity factors. We attribute this revealed preference to the desire to obtain "safe" international diversification. We then show that holdings of domestic MNCs are substantial and, after accounting for this home-grown foreign exposure, that the share of "foreign" equities in investors' portfolios roughly doubles, reducing (but not eliminating) the observed home bias.

JEL-codes: G11 G15 G3 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-fin and nep-fmk
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as “Foreign Exposure through Domestic Equities”. Finance Research Letters.

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Related works:
Working Paper: International diversification at home and abroad (2004)
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