International Portfolio Diversification Is Better Than You Think
Nicolas Coeurdacier and
No DR 06013, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School
Do investors completely ignore the basics of portfolio theory? Given their over-exposure on domestic risk, investors should try to hedge this risk by picking foreign assets that have low correlation with their home assets. In the data though, we find a robust positive relationship between bilateral equity holdings and bilateral return correlations. We argue that this finding could be driven by the common impact of financial integration on cross-border equity holdings and on cross-market correlations. Indeed, when we instrument current correlations with past correlations to control for endogeneity, we recover asset demand functions that decrease with returns correlation.
Keywords: Endogeneity Bias; Financial Integration; International Portfolio Choice; International Stock Return Correlations (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Pages: 30 pages
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Journal Article: International portfolio diversification is better than you think (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:essewp:dr-06013
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