International portfolio diversification is better than you think

Nicolas Coeurdacier and Stéphane Guibaud ()
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Stéphane Guibaud: LSE - London School of Economics and Political Science

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Abstract: Using aggregate data on bilateral cross-border equity holdings, we investigate whether investors correctly hedge their over-exposure to domestic risk (the well-known equity home bias) by investing in foreign stock markets that have low correlation with their home stock market. To deal with the endogeneity of stock return correlations, we instrument current correlations with past correlations. Controlling for many determinants of international portfolios, we find that, all else equal, investors do tilt their foreign holdings towards countries, which offer better diversification opportunities. The diversification motive that we uncover is stronger for source countries exhibiting a higher level of home bias.

Keywords: International Portfolio Choice; Bilateral Equity Holdings; Portfolio Diversi¯ca- tion; International Stock Return Correlations; Financial Integration; Endogeneity Bias (search for similar items in EconPapers)
Date: 2011-03
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Citations: View citations in EconPapers (58)

Published in Journal of International Money and Finance, 2011, 30 (2), pp.289 - 308. ⟨10.1016/j.jimonfin.2010.10.003⟩

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Related works:
Journal Article: International portfolio diversification is better than you think (2011)
Working Paper: International portfolio diversification is better than you think (2011)
Working Paper: International Portfolio Diversification Is Better Than You Think (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03602483

DOI: 10.1016/j.jimonfin.2010.10.003

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