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British Investment Overseas 1870-1913: A Modern Portfolio Theory Approach

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  • William N. Goetzmann
  • Andrey D. Ukhov

Abstract

We use a mean-variance approach to address the classic puzzle of British capital export in the 19th century. Our analysis shows that foreign securities listed in London offered significant diversification benefits to British investors. In simple terms, international diversification reduced risk. Conservative estimates of the optimal investment portfolio for a domestic investor suggest that the balance between foreign and domestic security offerings on the London Exchange was close to what classic equilibrium models of asset prices would suggest. Copyright 2006, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 10 (2006)
Issue (Month): 2 ()
Pages: 261-300

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Handle: RePEc:oup:revfin:v:10:y:2006:i:2:p:261-300

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  1. Segal, Harvey H. & Simon, Matthew, 1961. "British Foreign Capital Issues, 1865–1894," The Journal of Economic History, Cambridge University Press, vol. 21(04), pages 566-581, December.
  2. Dybvig, Philip H, 1984. " Short Sales Restrictions and Kinks on the Mean Variance Frontier," Journal of Finance, American Finance Association, vol. 39(1), pages 239-44, March.
  3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  4. Errunza, Vihang R. & Miller, Darius P., 2000. "Market Segmentation and the Cost of the Capital in International Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 577-600, December.
  5. Eun, Cheol S & Janakiramanan, S, 1986. " A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership," Journal of Finance, American Finance Association, vol. 41(4), pages 897-914, September.
  6. Stulz, Rene M & Wasserfallen, Walter, 1995. "Foreign Equity Investment Restrictions, Capital Flight, and Shareholder Wealth Maximization: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 1019-57.
  7. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1851-1872, September.
  8. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-34, September.
  9. Kaukiainen, Yrj, 2001. "Shrinking the world: Improvements in the speed of information transmission, c. 1820 1870," European Review of Economic History, Cambridge University Press, vol. 5(01), pages 1-28, April.
  10. Stulz, ReneM., 1981. "A model of international asset pricing," Journal of Financial Economics, Elsevier, vol. 9(4), pages 383-406, December.
  11. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
  12. Errunza, Vihang R & Senbet, Lemma W, 1981. "The Effects of International Operations on the Market Value of the Firm: Theory and Evidence," Journal of Finance, American Finance Association, vol. 36(2), pages 401-17, May.
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Citations

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Cited by:
  1. Matthias Morys & Guillaume Daudin, 2008. "Globalization, 1870-1914," Economics Series Working Papers 395, University of Oxford, Department of Economics.
  2. Bernal, Oscar & Oosterlinck, Kim & Szafarz, Ariane, 2010. "Observing bailout expectations during a total eclipse of the sun," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1193-1205, November.
  3. Rui P. Esteves, 2011. "The Political Economy of Global Financial Liberalisation in Historical Perspective," Oxford University Economic and Social History Series _089, Economics Group, Nuffield College, University of Oxford.
  4. Burhop, Carsten & Chambers, David & Cheffins, Brian, 2014. "Regulating IPOs: Evidence from going public in London, 1900–1913," Explorations in Economic History, Elsevier, vol. 51(C), pages 60-76.
  5. Kevin Hjortshøj O'Rourke, 2012. "From Empire to Europe: Britain in the World Economy," Economics Series Working Papers Number 106, University of Oxford, Department of Economics.
  6. Nicholas Crafts & Tim Leunig & Abay Mulatu, 2007. "Were British railway companies well-managed in the early twentieth century?," Economic History Working Papers 22549, London School of Economics and Political Science, Department of Economic History.
  7. Guillaume Daudin & Kevin H O'Rourke & Matthias Morys, 2008. "Europe and Globalization, 1870-1914," Sciences Po publications 2008-17, Sciences Po.
  8. Brian Mitchell & David Chambers & Nicholas Crafts, 2008. "How Good was the Profitability of British Railways, 1870-1912?," The Warwick Economics Research Paper Series (TWERPS) 859, University of Warwick, Department of Economics.
  9. Turner, John D., 2014. "Financial history and financial economics," QUCEH Working Paper Series 14-03, Queen's University Centre for Economic History, Queen's University Belfast.
  10. Crafts, Nicholas, 2012. "British relative economic decline revisited: The role of competition," Explorations in Economic History, Elsevier, vol. 49(1), pages 17-29.
  11. Benjamin Chabot & Christopher J. Kurz, 2009. "That's Where the Money Was: Foreign Bias and English Investment Abroad, 1866-1907," Working Papers 972, Economic Growth Center, Yale University.
  12. Nicholas Crafts, 2010. "Cliometrics and technological change: a survey," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 17(5), pages 1127-1147.
  13. repec:cge:warwcg:42 is not listed on IDEAS
  14. Campbell, Gareth, 2012. "Myopic rationality in a Mania," Explorations in Economic History, Elsevier, vol. 49(1), pages 75-91.
  15. Crafts, Nicholas, 2011. "British Relative Economic Decline Revisited," CEPR Discussion Papers 8384, C.E.P.R. Discussion Papers.

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