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Cross-Border Diversification in Bank Asset Portfolios

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  • Claudia M. Buch

    (University of Tuebingen)

  • John C. Driscoll

    (Federal Reserve Board and Council of Economic Advisors)

  • Charlotte Ostergaard

    ()
    (Norwegian School of Management and Norges Bank)

Abstract

Taking the mean-variance portfolio model as a benchmark, we compute the optimally diversified portfolio for banks located in France, Germany, the U.K., and the U.S. under different assumptions about currency hedging. We compare these optimal portfolios to the actual cross-border assets of banks from 1995-1999 and try to explain the deviations. We find that banks over-invest domestically to a considerable extent and that cross-border diversification entails considerable gain. Banks underweight countries which are culturally less similar or have capital controls in place. Capital controls have a strong impact on the degree of underinvestment whereas less political risk increases the degree of over-investment.

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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2004/11.

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Length: 39 pages
Date of creation: 01 Sep 2004
Date of revision:
Handle: RePEc:bno:worpap:2004_11

Note: First version November 2002, This version September 2004
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Keywords: international banking; portfolio diversification; international integration;

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