Cross-Border Diversification in Bank Asset Portfolios

Claudia Buch, John Driscoll and Charlotte Ostergaard

No 2004/11, Working Paper from Norges Bank

Abstract: Taking the mean-variance portfolio model as a benchmark, we compute the optimally diversified portfolio for banks located in France, Germany, the U.K., and the U.S. under different assumptions about currency hedging. We compare these optimal portfolios to the actual cross-border assets of banks from 1995-1999 and try to explain the deviations. We find that banks over-invest domestically to a considerable extent and that cross-border diversification entails considerable gain. Banks underweight countries which are culturally less similar or have capital controls in place. Capital controls have a strong impact on the degree of underinvestment whereas less political risk increases the degree of over-investment.

Keywords: international banking; portfolio diversification; international integration (search for similar items in EconPapers)
JEL-codes: E44 F40 G11 G21 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2004-09-01
New Economics Papers: this item is included in nep-eec, nep-fin, nep-ifn and nep-rmg
Note: First version November 2002, This version September 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Journal Article: Cross‐Border Diversification in Bank Asset Portfolios (2010)
Working Paper: Cross-border diversification in bank asset portfolios (2005)
Working Paper: Cross-border diversification in bank asset portfolios (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2004_11

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