The International Diversification Puzzle Is Worse Than You Think
AbstractDespite the growing integration of international financial markets, investors do not diversify internationally to any significant extent. The authors show that this 'international diversification puzzle' is deepened once they consider the implications of nontraded human capital for portfolio composition. While growth rates of labor and capital income are not highly correlated within countries, the authors find that the returns to human capital and physical capital are very highly correlated within four OECD countries. Hedging human capital risk therefore involves a substantial short position in domestic marketable assets. A diversified world portfolio will involve a negative position in domestic marketable assets. Copyright 1997 by American Economic Association.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 87 (1997)
Issue (Month): 1 (March)
Other versions of this item:
- Marianne Baxter & Urban J. Jermann, 1995. "The International Diversification Puzzle is Worse Than You Think," NBER Working Papers 5019, National Bureau of Economic Research, Inc.
- Baxter, M. & Jermann, U.J., 1993. "The International Diversification Puzzle is Worse than you Think," RCER Working Papers 350, University of Rochester - Center for Economic Research (RCER).
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
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