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International Portfolio Diversification Is Better Than You Think

Nicolas Coeurdacier and Stéphane Guibaud

No DR 06013, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: 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
Date: 2006-10
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Journal Article: International portfolio diversification is better than you think (2011) Downloads
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