The International Diversification Puzzle Is Worse Than You Think

Marianne Baxter () and Urban Jermann

American Economic Review, 1997, vol. 87, issue 1, 170-80

Abstract: Despite the growing integration of international financial markets, investors do not diversify internationally to any significant extent. The authors show that this 'international diversification puzzle' is deepened once they consider the implications of nontraded human capital for portfolio composition. While growth rates of labor and capital income are not highly correlated within countries, the authors find that the returns to human capital and physical capital are very highly correlated within four OECD countries. Hedging human capital risk therefore involves a substantial short position in domestic marketable assets. A diversified world portfolio will involve a negative position in domestic marketable assets. Copyright 1997 by American Economic Association.

Date: 1997
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Related works:
Working Paper: The International Diversification Puzzle is Worse Than You Think (1995)
Working Paper: The International Diversification Puzzle is Worse than you Think (1993)
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