Diversification, Integration and Emerging Market Closed-End Funds

Using an extensive new data set on U.S. and U.K.-traded closed- end funds, we examine the diversification benefits from emerging equity markets and the extent of their integration with global capital markets. To measure diversification benefits, we exploit the duality between Hansen-Jagannathan bounds [1991] and mean-standard deviation frontiers. We find significant diversification benefits for the U.K. country funds, but not for the U.S. funds. The difference appears to relate to differences in portfolio holdings. To investigate global market integration, we compute the reduction in expected returns an investor would be willing to accept to avoid investment barriers in six countries. We find evidence of investment restrictions for Indonesia, Taiwan and Thailand, but not for Korea, the Philippines or Turkey.

Dynamics of Individual Specialization and Global Diversification in Communities

We discuss a model of an economic community consisting of $N$ interacting agents. The state of each agent at any time is characterized, in general, by a mixed strategy profile drawn from a space of $s$ pure strategies. The community evolves as agents update their strategy profiles in response to payoffs received from other agents. The evolution equation is a generalization of the replicator equation. We argue that when $N$ is sufficiently large and the payoff matrix elements satisfy suitable inequalities, the community evolves to retain the full diversity of available strategies even as individual agents specialize to pure strategies.Comment: 13 pages, Late

Decomposing Terms of Trade Fluctuations in Ethiopia

This paper proposes a technique to decompose short-run fluctuations in the terms of trade. Using Ethiopia as an example, we decompose the commodity terms of trade into various components to measure the impact of price and volume shifts as well as export diversification. We use monthly data from the past decade, including periods during the global food and financial crises. Our findings suggest that diversification out of traditional coffee exports to other export commodities successfully mitigated a terms of trade shock. Continued export diversification will be beneficial.Terms of Trade, Food Price Crisis, Financial Crisis, Ethiopia

Acquisition versus greenfield foreign entry : diversification mode choice in Central and Eastern Europe

Departing from the traditional transaction cost approach in diversification mode literature, this study investigates the influence of experimental organizational learning on the choice between acquisition and a greenfield investment. We provide empirical support that prior experience with acquisitions and/or greenfield investments, firm?s predominant international strategy (global or multidomestic) and the technological intensity of the parent play a crucial role in subsequent diversifications. Furthermore, contrary to extant arguments that foreign ownership decision is independent of a diversification mode choice we demonstrate that the type of ownership (joint venture vs. wholly owned subsidiary) is a significant predictor of firms? preference for acquisition or a greenfield. Unlike Caves and Mehra (1986) and Larimo (2002) who found a positive relationship between acquisitions and full ownership, we show that acquisitions in Central and Eastern European (CEE) transition economies are unlikely to be wholly owned subsidiaries. In addition, we contribute to extant diversification literature by introducing another neglected predictor of firms? diversification strategy: We demonstrate the incremental power of hostcountries? institutional structure on investors? diversification choice.

How does the economic risk aversion affect biodiversity?

The present paper analyses the role played by risk aversion in the reconciling of agricultural income and biodiversity. A bio-economic mode which articulates bird community dynamics and representative farmers selecting land uses within an uncertain macro-economic context is developed. It is spatialized and calibrated at a regional scale for France through national databases. The impact of risk aversion is assessed on economic, agricultural and ecological outputs through projections at the 2050 horizon. A high enough aversion proves sufficient to promote global bio-economic performance and multi-functional agriculture. This occurs through a diversification mechanism on regional land-uses. Spatial disparities however suggest that public incentives could be necessary to reinforce the diversification and bio-economic effectiveness.Agriculture, Aversion, Bio-economic modeling, Bird, Biodiversity, Diversification, Public good, Spatial

Diversification, innovation, and imitation inside the Global Technological Frontier

Recent research highlights the relationship between economic development and productive diversification, which may be hindered by market failures. After identifying stages of diversification in disaggregated export data, the authors develop a metric for the flows of export"discoveries,"or inside-the-frontier innovations in developing countries. They then explore the empirical relationship between economic development and (1) inside-the-frontier-innovation as reflected by the introduction of new export products, (2) export diversification measured by an index of export-revenue concentration, and (3) on-the-frontier innovation as reflected in patents. The data suggest, unsurprisingly, that inside-the-frontier innovation is more common among poor countries than among industrial economies. Overall export diversification increases at low levels of development but declines with development after a high-income point, whereas patenting activity rises exponentially with development. The data also suggest that the relationship between the frequency of export discoveries and economic development is not due to changes in the industrial composition of exports. The authors use a simple model of innovation and imitation to test the hypothesis that the threat of imitation inhibits the discovery of new exports. Econometric evidence suggests that the frequency of export discoveries across countries rises with the returns of export activities (proxied by exogenous export growth during the sample period), but the magnitude of this effect increases with barriers to entry. The count-data estimations deal with unobserved international heterogeneity, and the results are robust to various changes in the specification of the empirical model. This finding supports the hypothesisthat market failures inhibit inside-the-frontier innovation.Economic Theory&Research,Markets and Market Access,Water Resources Assessment,Achieving Shared Growth,Airports and Air Services

The reinforcing influence of recommendations on global diversification

Recommender systems are promising ways to filter the overabundant information in modern society. Their algorithms help individuals to explore decent items, but it is unclear how they allocate popularity among items. In this paper, we simulate successive recommendations and measure their influence on the dispersion of item popularity by Gini coefficient. Our result indicates that local diffusion and collaborative filtering reinforce the popularity of hot items, widening the popularity dispersion. On the other hand, the heat conduction algorithm increases the popularity of the niche items and generates smaller dispersion of item popularity. Simulations are compared to mean-field predictions. Our results suggest that recommender systems have reinforcing influence on global diversification.Comment: 6 pages, 6 figure

Multinationals and the Gains from International Diversification

One possible explanation for home bias is that investors may obtain indirect international diversification benefits by investing in multinational firms rather than by investing directly in foreign markets. This paper employs mean-variance spanning tests to examine the diversification potential of multinational firms and foreign market indices for investors domiciled in Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. We find that in most countries and most time periods, the portfolio of domestic stocks spans the risk and return opportunities of a portfolio that includes domestic and multinational stocks. However, there is weak evidence that U.S. multinationals provided global diversification benefits in the full 1984-92 sample and in the post-1987 subsample. We also find that the addition of foreign market indices to a domestic portfolio - inclusive of multinationals - provides diversification benefits. The economic importance of the shift of the portfolio frontier - measured as the utility gain from diversification - varies considerably from market to market and often reflects the benefits of large short positions in certain markets.

Concordance in global office market cycles

A large proportion of international real estate investment is concentrated in the office markets of the world’s largest cities. However, many of these global cities are also key financial services centres, highlighting the possibility of reduced economic diversification from an investor’s perspective. This paper assesses the degree of synchronization in cycles across twenty of the world’s largest office markets, finding evidence of significant concordance across a large number of markets. The results highlight the problems associated with commonalities in the underlying economic bases of the markets. The concentration of investment also raises the possibility of common flow of funds effects that may further reduce diversification opportunities

Why do foreigners invest in the United States?

Why are foreigners willing to invest almost $2 trillion per year in the United States? The answer affects if the existing pattern of global imbalances can persist and if the United States can continue to finance its current account deficit without a major change in asset prices and returns. This paper tests various hypotheses and finds that standard portfolio allocation models and diversification motives are poor predictors of foreign holdings of U.S. liabilities. Instead, foreigners hold greater shares of their investment portfolios in the United States if they have less-developed financial markets. The magnitude of this effect decreases with income per capita. Countries with fewer capital controls and greater trade with the United States also invest more in U.S. equity and bond markets, and there is no evidence that foreigners invest in the United States based on diversification motives. The empirical results showing a primary role of financial market development in driving foreign purchases of U.S. portfolio liabilities supports recent theoretical work on global imbalances.