Kiel Working Papers, Kiel Institute for World Economics
No 1246:
International Diversification at Home and Abroad
Fang Cai and Francis E. Warnock
Abstract: We analyze foreigners’ and domestic institutional
investors’ positions in U.S. equities. Controlling for many factors, we
uncover a common preference for large firms and firms that are diversified
internationally. The domestic preference for internationally diversified
firms implies that investors might obtain substantial international
diversification by investing at home. Using an international factor model,
we show that exposure to foreign equity markets is indeed greater for
domestic firms that are more diversified internationally, suggesting that
at least some of the home-grown foreign exposure translates into
international diversification benefits. After accounting for home-grown
foreign exposure, the share of ‘foreign’ equities in investors’ portfolios
nearly doubles, reducing (but not eliminating) the observed home bias.
Keywords: home bias, international portfolio allocation, foreign exposure; (follow links to similar papers)
JEL-Codes: G11,; G15,; G3; (follow links to similar papers)
33 pages, May 2005
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