Are the Gains from Foreign Diversification Diminishing? Assessing the Impact with Cross-listed Stocks

Karen Lewis and Sandy Lai

No 18627, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How important is foreign diversification? In this paper, we re-examine this question motivated by findings from the literature about foreign companies that are listed on US exchanges. Specifically, domestic portfolios including cross-listed stocks can provide the same diversification as foreign market returns without the need for US investors to go abroad. At the same time, the betas of these foreign stock returns against the US market increase after cross-listing, suggesting diversification worsens over time. In this paper, we assess the impact of these changes on foreign diversification for a US investor. We test for and estimate breaks in the sensitivity of individual foreign stocks listed on US exchanges. We find that roughly half of the changes in betas arise from greater integration between the U.S. and the companies' home markets, not in the companies betas themselves. Moreover, the gains from diversifying into these stocks has declined over time.

JEL-codes: C32 F36 G15 (search for similar items in EconPapers)
Date: 2012-12
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Are the Gains from Foreign Diversification Diminishing? Assessing the Impact with Cross-Listed Stocks (2010)
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