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International portfolio diversification is better than you think

By Nicolas Coeurdacier and Stéphane Guibaud

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

Topics: HG Finance
Publisher: Elsevier
Year: 2011
DOI identifier: 10.1016/j.jimonfin.2010.10.003
OAI identifier: oai:eprints.lse.ac.uk:32264
Provided by: LSE Research Online
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