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Multinationals and the Gains from International Diversification

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  • Patrick F. Rowland

    (Fordham University)

  • Linda L. Tesar

    (University of Michigan)

Abstract

This paper employs mean-variance spanning tests to examine the diversification potential of multinational firms and foreign market indices from the perspective of investors in the G7 countries over the 1984-95 period. We find evidence that multinational corporations may have provided diversification benefits for investors in Germany and the United States. We find that the addition of foreign market indices to a domestic portfolio - inclusive of multinationals - provided substantial diversification benefits in all countries. The economic importance of the shift of the portfolio frontier varied considerably across markets. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2004.05.001
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 7 (2004)
Issue (Month): 4 (October)
Pages: 789-826

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Handle: RePEc:red:issued:v:7:y:2004:i:4:p:789-826

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Keywords: Diversification; Spanning; Home Bias; Multinationals;

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References

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  1. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, American Economic Association, vol. 60(4), pages 668-75, September.
  2. Lewis, K.K., 1996. "Consumption, Stock Returns, and the Gains from International Risk-Sharing," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 96-4, Wharton School - Weiss Center for International Financial Research.
  3. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(4), pages 467-492, August.
  4. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, American Economic Association, vol. 81(2), pages 222-26, May.
  5. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of security market data for models of dynamic economies," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 29, Federal Reserve Bank of Minneapolis.
  6. MacKinlay, A Craig & Richardson, Matthew P, 1991. " Using Generalized Method of Moments to Test Mean-Variance Efficiency," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 511-27, June.
  7. Geert Bekaert & Michael S. Urias, 1995. "Diversification, Integration and Emerging Market Closed-End Funds," NBER Working Papers 4990, National Bureau of Economic Research, Inc.
  8. Gordon M. Bodnar & Gregory S. Hayt & Richard C. Marston, 1998. "1998 Wharton Survey of Financial Risk Management by US Non-Financial Firms," Financial Management, Financial Management Association, Financial Management Association, vol. 27(4), Winter.
  9. Karen K. Lewis, 1996. "Consumption, Stock Returns, and the Gains from International Risk-Sharing," NBER Working Papers 5410, National Bureau of Economic Research, Inc.
  10. Linda L. Tesar & Ingrid M. Werner, 1994. "International Equity Transactions and U.S. Portfolio Choice," NBER Chapters, National Bureau of Economic Research, Inc, in: The Internationalization of Equity Markets, pages 185-227 National Bureau of Economic Research, Inc.
  11. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(1-2), pages 3-56, February.
  12. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(4), pages 631-53, October.
  13. Jobson, J. D. & Korkie, Bob, 1989. "A Performance Interpretation of Multivariate Tests of Asset Set Intersection, Spanning, and Mean-Variance Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 24(02), pages 185-204, June.
  14. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 937-69, July.
  15. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 28(1), pages 3-24, August.
  16. Karen K. Lewis, 1996. "Consumption, stock returns, and the gains from international risk-sharing," Working Papers 96-6, Federal Reserve Bank of Philadelphia.
  17. Lewis, Karen K., 2000. "Why do stocks and consumption imply such different gains from international risk sharing?," Journal of International Economics, Elsevier, Elsevier, vol. 52(1), pages 1-35, October.
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